Examining The Impact Of Crude Oil Price Shocks On Some Macroeconomic Variables In Nigeria Using Garch And Var Models

Description

– Examining The Impact Of Crude Oil Price Shocks On Some Macroeconomic Variables In Nigeria Using Garch And Var Models –

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Abstract

This study evaluates the impact of Crude Oil Price (COP) on the Exchange Rate (EXCHR), External Reserves (EXRS), Gross Domestic Product (GDP), Inflation Rate (INFL), International Trade (INTR) and Money Supply (MSUP) in Nigeria with quarterly data from 1995 to 2014 using GARCH and VAR models.

From the analysis, all the variables were stationary at first difference with p-value less than 0.05. The presence of heteroscedasticity was found in exchange rate with some of its coefficient models being significant at 5% level; and the forecasting model for exchange rate is GARCH (2, 1).

The findings further showed that negative crude oil shocks did not pose an inflationary threat on Nigerian economy, but rather it improved output growth in terms of GDP and enhanced the flow of MSUP.

On the other hand, negative crude oil price shocks did affect external reserves and international trade due to the recent fall in the price of crude oil which calls for a diversification of economy in Nigeria.

Introduction

1.1 Background of the Study

Crude oil plays a central role in bringing wealth and power to the world as Mehrara and Mohaghegh (2011) underscored.

Several countries around the globe have experienced existing financial crises in the last two decades, namely: the Mexican crisis (1994), the Asian crisis (1997), the Russian crisis (1998),

the Brazilian crisis (1999), the Argentina crisis (2002), the Iraq crises (2004), the US subprime crisis (2008) and the Greek crisis (2010) which diverted macroeconomic variables to extreme volatility and to disorder noted by Gaye and Sercan (2013).

Hamilton (1983) documented that sharp rises in oil prices caused worldwide recessions and stock market collapses.

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