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EFFECTS OF FLUCTUATIONS IN OIL
PRICE ON MACROECONOMIC VARIABLES
IN NIGERIA
Olaide Kayode Emmanuel, Carleton University Ottawa, Canada
34TH USAEE/IAEE NORTH AMERICAN CONFERENCE, TULSA, OKLAHOMA.
OCTOBER 24, 2016
AIM AND SIGNIFICANCE

The purpose of this study is to re-examine how the volatility in oil prices
impacts on the Nigerian economy, as an energy-dependent economy and a
major world producer and exporter of oil using certain key macroeconomic
variables

Output, interest rate, inflation rate, unemployment rate, money supply,
government expenditure and exchange rate

Since the discovery of oil in commercial quantities in Nigeria, oil has become
the main stay of the Nigerian economy
LITERATURE REVIEW

Hamilton’s (1983); Burbidge and Harrison (1984)

Lescaroux and Mignon (2008); LeBlanc and Chinn (2004)

Gisser and Goodwin (1986); Ferderer (1996); Carruth, Hooker and Oswald
(1998) and Hooker (2002); Guo and Kliesen (2005)

Lardic and Mignon (2006); Narayan and Narayan (2007); Narayan and Narayan
(2007); Cologni and Manera (2009); Elder and Serletis (2010)

Ahmed and Wadud (2011); Jo (2013); Salim and Rafiq (2013)

Gunu and Kilishi (2010); Iwayemi and Fowowe (2010); Iwayemi and Fowowe
(2010); Demachi (2012); Apere and Ijomah (2013)
METHODOLOGY

Autoregressive distributed lag (ARDL) model:

∆𝑂𝑃𝑡 =µ1+
(1)
𝑛
𝑠=0
𝛾 1,𝑠 ∆𝑂𝑃𝑡−𝑠 +

∆𝑀𝑉𝑡 =µ2+
(2)
𝑛
𝑠=0
𝜃 1,𝑠 ∆𝑂𝑃𝑡−𝑠 +

Vectorautoregressive (VAR) model

Vector Error Correction Model (VECM)

Impulse Response Functions and Forecast Error Variance Decomposition
𝑛
𝑠=0
𝑛
𝑠=0
𝛾 2,𝑠 ∆𝑀𝑉𝑡−𝑠 +𝛿1 𝑂𝑃𝑡−1+𝛿2 𝑀𝑉𝑡−1+𝜂1,𝑡
𝜃 2,𝑠 ∆𝑀𝑉𝑡−𝑠 +𝜋1 𝑂𝑃𝑡−1+𝜋2 𝑀𝑉𝑡−1+𝜂2,𝑡
Results of unit roots test
VARIABLE
ADF
DF-GLS
RGDP
0.313
-0.325
MS
2.717
-1.169
INTR
-1.869
-1.221
INFR
-3.65
-3.623
UNEMPR
-0.166
-0.727
EXCR
-1.849
-1.333
GEXP
2.39
-1.201
OP
-1.028
-1.179
DRGDP
-4.4
-4.352
DMS
-4.214
-3.645
DINTR
-7.438
-7.336
DINFR
-6.497
-6.581
DUNEMPR
-3.835
-3.764
DEXCR
-4.197
-4.137
DGEXP
-3.943
-3.75
DOP
-5.795
-5.61
Results of ARDL cointegration
estimation
F-STATISTICS
VARIABLE
RGDP/OP
1.38
OP/RGDP
0.79
MS/OP
10.66
OP/MS
1.46
INTR/OP
1.44
OP/INTR
0.36
INFR/OP
1.55
OP/INFR
0.42
UNEMPR/OP
1.62
OP/UNEMPR
1.48
EXCR/OP
0.06
OP/EXCR
1.69
GEXP/OP
5.81
OP/GEXP
1.57
Results for the VAR Granger causality Wald tests
Equation
Excluded
chi2
df
Prob > chi2
D_OP
D.RGDP
0.16964
1
0.68
D_OP
ALL
0.16964
1
0.68
D_RGDP
D.OP
2.3844
1
0.123
D_RGDP
ALL
2.3844
1
0.123
Results for the VAR Granger causality Wald tests
Equation
Excluded
chi2
df
Prob > chi2
OP
INTR
.37504
1
0.540
OP
ALL
.37504
1
0.540
INTR
OP
.17277
1
0.678
INTR
ALL
.17277
1
0.678
Results for the VAR Granger causality Wald tests
Excluded
chi2
df
Prob > chi2
OP
INFR
.22812
1
0.633
OP
ALL
.22812
1
0.633
INFR
OP
.80123
1
0.371
INFR
ALL
.80123
1
0.371
Equation
Results for the VAR Granger causality Wald tests
Equation
Excluded
chi2
df
Prob > chi2
D_OP
D.UNEMPR
.07546
1
0.784
D_OP
ALL
.07546
1
0.784
D.UNEMPR
D.OP
.16813
1
0.682
D.UNEMPR
ALL
.16813
1
0.682
Results for the VAR Granger causality Wald tests
Equation
Excluded
chi2
df
Prob > chi2
D_OP
D.EXCR
2.3068
1
0.129
D_OP
ALL
2.3068
1
0.129
D.EXCR
D.OP
.03163
1
0.859
D.EXCR
ALL
.03163
1
0.859
Test results for the VECMs
VARIABLE
chi2
Prob > chi2
ECT t-STATISTIC
P>|t|
OP/MS
2.071987
0.3549
-0.6
0.549
MS/OP
99.00253
0.0000
8.31
0.000
OP/GEXP
1.698612
0.4277
0.03
0.978
GEXP/OP
45.88497
0.0000
4.96
0.000
MODEL SPECIFICATION TEST
-1
-.5
0
Imaginary
.5
1
Roots of the companion matrix
-1
-.5
0
Real
.5
1
Parameter instability test for OP versus INTR VAR
specification
-1
-.5
0
Imaginary
.5
1
Roots of the companion matrix
-1
-.5
0
Real
.5
1
Parameter instability test for OP versus INFR VAR specification
-1
-.5
0
Imaginary
.5
1
Roots of the companion matrix
-1
-.5
0
Real
.5
1
Parameter instability test for DOP versus DUNEMPR VAR
specification
-1
-.5
0
Imaginary
.5
1
Roots of the companion matrix
-1
-.5
0
Real
.5
1
Parameter instability test for DOP versus DEXCR VAR
specification
-1
-.5
0
Imaginary
.5
1
Roots of the companion matrix
-1
-.5
0
Real
.5
1
Parameter instability test for OP versus MS VEC
specification
-1
-.5
0
Imaginary
.5
1
Roots of the companion matrix
-1
-.5
0
Real
.5
The VECM specification imposes 1 unit modulus
1
Results of IRFs

For the VAR models, the IRF dies out for each the variables real GDP, interest
rate, inflation rate, unemployment rate, and exchange rate; confirming the
results that the oil price has no impact on these variables.

For the VEC models, the IRF shows that a shock to the oil price has a
permanent effect on each of the variables money supply and government
expenditure.
Results of FEVD

The results show that none of the forecast error variance in each of the real
GDP, interest rate, inflation rate, unemployment rate, and exchange rate is
attributable to the shock in oil price.

A greater proportion of the forecast error variance in each of the money
supply and government expenditure is due to the shock in oil price.
Forecasting with the VAR and VEC models

Based on this models, predicted at the levels of the variables, the oil price
will rise first, and then remain constant at less than US$100 per barrel

At the first difference forecast, the figure shows that the oil price will rise
first, then falls and remain constant around less than US$10 per barrel

The real GDP is expected to fall and then remain constant at less than fifty
billion naira into the distant future.

The interest rate is expected to rise and then remain constant at twenty
percent into the distant future.
Forecasting with the VAR and VEC

The inflation rate is expected to rise and then remain constant around ten
percent into the distant future.

The unemployment rate is expected to fall and then remain constant at less
than two percent into the distant future.

The exchange rate is expected to rise and then remain constant at less than
ten percent into the distant future.

The money supply is expected to increase perpetually into the distant future.

The government expenditure is expected to increase perpetually into the
distant future.
CONCLUSION AND POLICY
IMPLICATIONS

Nigeria has not used the huge revenue realized from its oil and gas sector
during the period of oil windfalls and rising oil prices to grow its economy

Inflation in Nigeria is a monetary phenomenon as a response of the domestic
price levels to the increase in money supply, which responds to oil price.

It is therefore suggested that Nigeria needs to diversify its economy and
sources of revenue; maintain prudent fiscal management and fiscal discipline;
make the governmental institutions, agencies and parastatals more
transparent at all tiers of government, and curb corruption and financial
misappropriation, especially in the oil and gas sector of the economy.
THANK YOU