Crude Oil Price Dynamics and Transmission Mechanism of the Macroeconomic Indicators in Nigeria

Abstract

The preoccupation of this study is to investigate the dynamic impacts of crude oil price on the economic growth of Nigeria. The technique of estimation used in this study is the structural vector autoregressive type. This method is applied to articulate the transmission mechanism of macroeconomic effects of domestic price level, economic output, money supply and volatile crude oil price in Nigeria. The study sample covers the period between 1985 and 2010. The data used are on a quarterly basis. The results of both the impulse response functions and the forecast error variance decompositions indicate that domestic shocks are responsible for a reasonable portion of crude oil price fluctuations. Although crude oil price volatility has significant positive impacts on economic output, however, money supply shocks are the main cause of gross domestic product fluctuations. This study concludes that crude oil price has very important impact on the Nigerian economy and the monetary policy is the channel through which this impact transmits.