Macroeconomics of oil price volatility

Abstract

Nigeria has a long history with oil. Among the challenges associated with oil, frequent changes in the prices of oil have produced macro-fiscal risk for the country. This study attempts to verity the direct and indirect impact of oil price volatility on Nigeria’s economy. The indirect impact attempts to trace the impact of oil price volatility on selected macroeconomic variables through public expenditure, while the direct impacts tied the same selected macroeconomic variables directly on oil price volatility. This study utilized the methodology of Vector Autoregression and dynamic simulations of forecasting error variance decomposition. In addition, the pair wise Granger causality is also deployed. The study finds out that oil price volatility significantly stimulate most of the macroeconomic variables and Nigeria’s public expenditure. Furthermore, public expenditure impacts on most of the macroeconomic variables. The study recommends that efforts should be made to safeguard both the quantity and quality of public expenditure through appropriate revenue policy measure, promoting sound fiscal institutions, promote budget flexibility and diversification of the revenue base.

Keywords: Price volatility, public expenditure, macroeconomy, variance decomposition