The Impact of Oil Price Shock and Exchange Rate Volatility on Economic Growth in Nigeria.

Topics: Economics, Macroeconomics, Inflation Pages: 25 (7038 words) Published: March 19, 2012
Munich Personal RePEc Archive

Impact of Oil Price Shock and Exchange Rate Volatility on Economic Growth in Nigeria: An Empirical Investigation Aliyu, Shehu Usman Rano Bayero University Kano, Nigeria

03. May 2009

Online at MPRA Paper No. 16319, posted 16. July 2009 / 22:47


Impact of Oil Price Shock and Exchange Rate Volatility on  Economic Growth in Nigeria: An Empirical Investigation   

Shehu Usman Rano Aliyu 1 

Abstract This paper seeks to assess the impact of oil price shock and real exchange rate volatility on real economic growth in Nigeria on the basis of quarterly data from 1986Q1 to 2007Q4. The empirical analysis starts by analyzing the time series properties of the data which is followed by examining the nature of causality among the variables. Furthermore, the Johansen VAR-based cointegration technique is applied to examine the sensitivity of real economic growth to changes in oil prices and real exchange rate volatility in the long-run while the short run dynamics was checked using a vector error correction model. Results from ADF and PP tests show evidence of unit root in the data and Granger pairwise causality test revealed unidirectional causality from oil prices to real GDP and bidirectional causality from real exchange rate to real GDP and vice versa. Findings further show that oil price shock and appreciation in the level of exchange rate exert positive impact on real economic growth in Nigeria. The paper recommends greater diversification of the economy through investment in key productive sectors of the economy to guard against the vicissitude of oil price shock and exchange rate volatility.

  Keywords: Cointegration, Granger Causality, Oil price shock, Exchange Rate Volatility, VECM JEC Classification Codes: F40; F41, F43 



Analysis of the impact of asymmetric shocks occasioned by exchange rate and oil price variability on economic growth has been a major preoccupation of both academics and policy makers for some decades now. On the one hand, it has been recognized in the literature that depreciation of exchange rate tends to expand exports and reduce imports, while the appreciation of exchange rate would discourage exports and encourage imports. Thus, exchange rate depreciation leads to income transfer from importing countries to exporting countries through a shift in the terms of trade, and this affects the economic growth of both importing and exporting nations. On the other hand, the perception that oil price spikes have a serious negative effect on the economies is based largely on the close correlation in the timing of oil price spikes and


The author is an Associate Professor of Economics at Bayero University Kano. He is, at the time of writing this paper, a visiting scholar working with the Research Department of the Central Bank of Nigeria, Abuja on a Sabbatical leave. Email:, Mobile: +2348037875246 



economic downturns2. While Greenspan (2004) noted that the impact of oil prices alone in modern market-based economies is difficult to infer in a way in which policy is automatically obvious, McKillop (2004) argued that higher oil prices reduce economic growth, generate stock exchange panics and produce inflation, which eventually lead to monetary and financial instability. It will also lead to higher interest rates and even a plunge into recession. Jin (2008) argued that sharp increase in the international oil prices and violent fluctuation of the exchange rate are generally regarded as factors discouraging economic growth. Previous research on the impact of exchange stability on growth has tended to find weak evidence in favor of a positive impact of exchange rate stability on growth. For large country samples; Ghosh, Gulde and Wolf (2003) discovered weak evidence that exchange rate stability...
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