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Asymetric Effect of Oil Price Shocks on Exchange Rate Volatility and Domestic Investment in Nigeria

Author

Listed:
  • Riman, Hodo B.
  • Akpan, Emmanuel S.
  • Offiong, Amenawo I

Abstract

Aim: The paper aimed at examining the asymmetric effect of oil price shock on exchange rate and domestic investment in Nigeria. Study Design: Country case study. Place and Duration of Study: Nigeria. Time series data ranging from 1970-2010. Methodology: This study utilised elaborate econometric analysis which tests the sensitivity of exchange rate, private investment, public investment, per capita income and industrial production to oil price shocks, using the Impulse Response Functions (IRFs) and Variance Decomposition (VDC) techniques within a Vector Autoregressive (VAR) framework. Results: The result clearly revealed that while government expenditure exhibited immediate positive response to oil price shock, public investment, private investment and industrial production exhibited negative response to oil price shock, further confirming the evidence of “Dutch disease” in Nigeria. The variance decomposition analysis further revealed that exchange rate, government expenditure and domestic investment were mainly affected by oil shock, particularly, in the short run. Conclusion: The study concludes that volatility in crude oil prices has negative impact on domestic investment and industrial development in Nigeria. It is recommended among other things in this study that the usual practice of sharing oil windfalls to the three tiers of government should be discouraged; rather, the central government should allocate these windfalls to priority sectors of the economy to enhance development.

Suggested Citation

  • Riman, Hodo B. & Akpan, Emmanuel S. & Offiong, Amenawo I, 2013. "Asymetric Effect of Oil Price Shocks on Exchange Rate Volatility and Domestic Investment in Nigeria," MPRA Paper 53282, University Library of Munich, Germany, revised 21 Aug 2013.
    • Handle: RePEc:pra:mprapa:53282
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    References listed on IDEAS

    as
    1. Frankel, Jeffrey A., 2010. "The Natural Resource Curse: A Survey," Scholarly Articles 4454156, Harvard Kennedy School of Government.
    2. van der Ploeg, Frederick & Poelhekke, Steven, 2007. "Volatility, Financial Development and the Natural Resource Curse," CEPR Discussion Papers 6513, C.E.P.R. Discussion Papers.
    3. Aliyu, Shehu Usman Rano, 2009. "Oil Price Shocks and the Macroeconomy of Nigeria: A Non-linear Approach," MPRA Paper 18726, University Library of Munich, Germany, revised 16 Nov 2009.
    4. Oomes, Nienke & Kalcheva, Katerina, 2007. "Diagnosing Dutch disease : Does Russia have the symptoms?," BOFIT Discussion Papers 7/2007, Bank of Finland, Institute for Economies in Transition.
    5. Arezki, Rabah & Ismail, Kareem, 2013. "Boom–bust cycle, asymmetrical fiscal response and the Dutch disease," Journal of Development Economics, Elsevier, vol. 101(C), pages 256-267.
    6. Chuku, Chuku & Effiong, Ekpeno & Sam, Ndifreke, 2010. "Oil price distortions and their short- and long-run impacts on the Nigerian economy," MPRA Paper 24434, University Library of Munich, Germany.
    7. Farzanegan, Mohammad Reza & Markwardt, Gunther, 2009. "The effects of oil price shocks on the Iranian economy," Energy Economics, Elsevier, vol. 31(1), pages 134-151, January.
    8. repec:zbw:bofitp:2007_007 is not listed on IDEAS
    9. Martin Schneider, 2004. "The Impact of Oil Price Changes on Growth and Inflation," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 2, pages 27-36.
    10. Ramzi Issa & Robert Lafrance & John Murray, 2006. "The Turning Black Tide: Energy Prices and the Canadian Dollar," Staff Working Papers 06-29, Bank of Canada.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Ayeni, Oluwasegun David, 2018. "Oil Price Shocks, Exchange Rate Volatility and Investment in Nigeria," MPRA Paper 99462, University Library of Munich, Germany, revised 2018.
    2. Adebayo Augustine Kutu & Harold Ngalawa, 2016. "Monetary Policy Shocks and Industrial Sector Performance in South Africa," Journal of Economics and Behavioral Studies, AMH International, vol. 8(3), pages 26-40.
    3. Galadima, Mukhtar Danladi & Aminu, Abubakar Wambai, 2019. "Shocks effects of macroeconomic variables on natural gas consumption in Nigeria: Structural VAR with sign restrictions," Energy Policy, Elsevier, vol. 125(C), pages 135-144.
    4. Osaretin Kayode Omoregie & Sodik Adejonwo Olofin, 2020. "Corporate Performance in Nigeria: The Effect of Oil Price and Exchange Rate Fluctuations," International Journal of Economics and Financial Issues, Econjournals, vol. 10(1), pages 170-179.
    5. Tochukwu Timothy Okoli & Devi Datt Tewari & Ajibola Rhodaoluwafisayomi, 2018. "The Relationship between Oil Price Volatility and Macroeconomic Variables in Nigeria: A Vector Autoregressive (VAR) Approach," Journal of Economics and Behavioral Studies, AMH International, vol. 9(6), pages 237-251.
    6. D. O. Olayungbo & T. A. Ojeyinka, 2022. "Crude oil prices pass-through to retail petroleum product prices in Nigeria: evidence from hidden cointegration approach," Economic Change and Restructuring, Springer, vol. 55(2), pages 951-972, May.
    7. Agya Atabani Adi & Udoh Friday, 2017. "The Impact Of Oil Shock On Nigeria Economy: Asymmetry Effect Analysis," Journal of Social and Economic Statistics, Bucharest University of Economic Studies, vol. 6(1), pages 60-74, JULY.
    8. Omolade Adeleke & Nwosa Philip & Ngalawa Harold, 2019. "Monetary Transmission Channel, Oil Price Shock and the Manufacturing Sector in Nigeria," Folia Oeconomica Stetinensia, Sciendo, vol. 19(1), pages 89-113, June.
    9. Harold Ngalawa & Adebayo Augustine Kutu, 2017. "Modelling exchange rate variations and global shocks in Brazil," Zbornik radova Ekonomskog fakulteta u Rijeci/Proceedings of Rijeka Faculty of Economics, University of Rijeka, Faculty of Economics and Business, vol. 35(1), pages 73-95.

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    More about this item

    Keywords

    Impulse response function; variance decomposition analysis; vector autoregression; oil price shock; domestic investment; government expenditure; exchange rate.;
    All these keywords.

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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