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Energy Policy 39 (2011) 603–612

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Energy Policy
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Impact of oil price shocks on selected macroeconomic variables in Nigeria Akin Iwayemi 1, Babajide Fowowe n
Department of Economics, University of Ibadan, Ibadan, Nigeria

a r t i c l e in f o
Article history: Received 14 January 2010 Accepted 20 October 2010 Available online 11 November 2010 Keywords: Oil price shocks Nonlinear models Nigeria

The impact of oil price shocks on the macroeconomy has received a great deal of attention since the 1970 s. Initially, many empirical studies found a significant negative effect between oil price shocks and GDP but more recently, empirical studies have reported an insignificant relationship between oil shocks and the macroeconomy. A key feature of existing research is that it applies predominantly to advanced, oil-importing countries. For oil-exporting countries, different conclusions are expected but this can only be ascertained empirically. This study conducts an empirical analysis of the effects of oil price shocks on a developing country oil-exporter—Nigeria. Our findings showed that oil price shocks do not have a major impact on most macroeconomic variables in Nigeria. The results of the Granger-causality tests, impulse response functions, and variance decomposition analysis all showed that different measures of linear and positive oil shocks have not caused output, government expenditure, inflation, and the real exchange rate. The tests support the existence of asymmetric effects of oil price shocks because we find that negative oil shocks significantly cause output and the real exchange rate. & 2010 Elsevier Ltd. All rights reserved.

1. Introduction The impact of oil price shocks on the macroeconomy has received a great deal of attention since the 1970s when the recessions experienced in USA and some European countries were preceded by oil shocks, which mainly arose as a result of Middle East conflicts. This led to a proliferation of studies that attempted to draw the causal link between oil shocks and macroeconomic activities. Many of the early empirical studies found a significant negative effect between oil price shocks and GDP and this was used as evidence that oil shocks were responsible for economic recessions (Hamilton, 1983; Mork, 1989). The transmission mechanisms of oil shocks to the economy vary from the supply effect to demand effect to the terms of trade effect (Brown et al., 2004; Schneider, 2004; Lardic and Mignon, 2006; Sill, 2007; Jbir and Zouari-Ghorbel, 2009). On the supply side, increased oil prices result in a reduction in an input for production and this leads to higher production costs, thus leading to a slowdown of output and productivity. On the demand side, higher oil prices increase the general level of prices and with a reduction in real income available for consumption, demand falls (Farzanegan and Markwardt, 2009). On the terms of trade side, oil-importing countries face worsening terms of trade conditions as demand falls in these countries and this results in wealth transfer from oil-importing to oil-exporting countries. n

Corresponding author. Tel.: + 234 8066169691. E-mail addresses: (A. Iwayemi), (B. Fowowe). 1 Tel.: +234 8023468751. 0301-4215/$ - see front matter & 2010 Elsevier Ltd. All rights reserved. doi:10.1016/j.enpol.2010.10.033

In recent times, however, some studies have questioned the importance attached to oil shocks in affecting output (Hooker, 1996; Hamilton, 1996) owing to 3 features of the oil– macroeconomy relationship. These are (i) the asymmetric effect of oil price shocks, (ii) the declining impact of oil on the economy, and (iii) the role of monetary policy. Many empirical studies have established the asymmetric effects of oil shocks on economic activities: oil price increases are associated with lower output but oil...
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