Sdakl

Topics: Inflation, Price of petroleum, OPEC Pages: 27 (7488 words) Published: April 18, 2013
Energy Policy 39 (2011) 603–612

Contents lists available at ScienceDirect

Energy Policy
journal homepage: www.elsevier.com/locate/enpol

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

abstract
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: akiniwayemi@hotmail.com (A. Iwayemi), babafowowe@hotmail.com (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...

References: Abeysinghe, T., 2001. Estimation of direct and indirect impact of oil price on growth. Economics Letters 73, 147–153. Bachmeier, L., 2008. Monetary policy and the transmission of oil shocks. Journal of Macroeconomics 30, 1738–1755. Brown, S.P.A., Yucel, M.K., Thompson, J., 2004, Business cycles: the role of energy prices, Research Department Working Paper 0304, Federal Reserve Bank of Dallas. Farzanegan, M.R., Markwardt, G., 2009. The effects of oil price shocks on the Iranian economy. Energy Economics 31, 134–151. Greene, W.H., 2003. Econometric Analysis Fifth ed. Prentice Hall, New Jersey. Hamilton, J.D., 1983. Oil and the macroeconomy since World War II. The Journal of Political Economy 91 (2), 228–248.
Hamilton, J.D., 1994. Time Series Analysis. Princeton University Press, New Jersey. Hamilton, J.D., 1996. This is what happened to the oil price-macroeconomy relationship. Journal of Monetary Economics 38, 215–220. Hamilton, J.D., 2003. What is an oil shock? Journal of Econometrics 113 363–398. Hooker, M.A., 1996. What happened to the oil price–macroeconomy relationship? Journal of Monetary Economics 38 195–213. Jbir, R., Zouari-Ghorbel, S., 2009. Recent oil price shock and Tunisian economy. Energy Policy 37, 1041–1051. Lardic, S., Mignon, V., 2006. The impact of oil prices on GDP in European countries: an empirical investigation based on asymmetric cointegration. Energy Policy 34, 3910–3915. Lee, K., Ni, S., Ratti, R.A., 1995. Oil shocks and the economy: the role of price variability. Energy Journal 16, 39–56. Lorde, T., Jackman, M., Thomas, C., 2009. The macroeconomic effects of oil price fluctuations on a small open oil-producing country: the case of Trinidad and Tobago. Energy Policy 37, 2708–2716. Mehrara, M., Oskoui, K.N., 2007. The sources of macroeconomic fluctuations in oil exporting countries: a comparative study. Economic Modelling 24, 365–379. Mehrara, M., 2008. The asymmetric relationship between oil revenues and economic activities: the case of oil-exporting countries. Energy Policy 36, 1164–1168. Mork, K.A., 1989. Oil and the macroeconomy when prices go up and down: an extension of Hamilton’s results. The Journal of Political Economy 97 (3), 740–744. Naka, A., Tufte, D., 1997. Examining impulse response functions in cointegrated systems. Applied Economics 29, 1593–1603. Olomola, P.A., Adejumo, A.V., 2006. Oil price shock and macroeconomic activities in Nigeria. International Research Journal of Finance and Economics 3, 28–34. Schneider, M., 2004. The impact of oil price changes on growth and inflation. Monetary Policy and the Economy Q2/04. Sill, K., 2007. The macroeconomics of oil shocks. Business Review Q1 (2007), 21–31. Sims, C.A., 1980. Macroeconomics and reality. Econometrica 48 (1), 1–48.
Continue Reading

Please join StudyMode to read the full document

Become a StudyMode Member

Sign Up - It's Free