Modeling the Impact of Crude Oil Price Shocks on Some Macroeconomic Variables in Nigeria Using Garch and VAR Models

Abstract

This study investigated the impact of crude oil shocks (COP) on exchange rate (EXCHR), external reserves (EXRS), gross domestic product (GDP), inflation rate (INFL), international trade (INTR) and money supply (MSUP) in Nigeria with a quarterly data from 2000 to 2014 using GARCH and VAR models. From the analysis, all the variables were stationary at first difference with p-value less than 0.05. The presence of heteroscedasticity was found in exchange rate with most of its coefficient models being significant at 5% level and the forecasting model for exchange rate is GARCH (2, 1). Crude oil shocks did not pose significant inflationary threat to the Nigerian economy in the short run; rather, it improves the level of gross domestic product. However, external reserves and international trade were significantly affected due to the recent fall in crude oil export. Oil shocks also positively affected money supply showing that monetary policy response to oil price changes; at the same time, money supply did affect GDP. These show that a diversified economy is really needed.