Munich Personal RePEc Archive

Oil Price Shock and Fiscal-Monetary Policy Variables in Nigeria: A Structural VAR Approach

Okunoye, Ismaila and Hammed, Sabuur (2020): Oil Price Shock and Fiscal-Monetary Policy Variables in Nigeria: A Structural VAR Approach. Forthcoming in: Asian Journal of Economics and Banking No. AJEB 2021

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Abstract

The study employed structural vector auto regressive model in a disaggregated analysis to measure the relative response of monetary and fiscal policy variables to the structural Oil price shocks in a small open and oil-dependent economy and identify sequence of appropriate policy response. Data utilized cover annual time series from 1981 to 2019. The study considers SVAR model with better and efficient tool to combine both short run and long run restrictions. Some empirical striking findings are discernible from our analyses. First, we establish that significant variation in monetary policy rate, exchange rate and money supply are explained by oil price shock. Second, we found that oil price shock have a significant impact on inflation rate, oil revenue and government expenditure. Lastly, we found that government expenditure has less innovations (less error term), compared to oil revenue and interest rate, and this indicates the direct policy of the government and not under the influence of monetary policy in Nigeria. Moreso, the result found more importantly, large reaction of inflation rate comes from oil price shock than the independent monetary policy rate and oil price shock caused large variation and reaction in monetary policy variable than fiscal policy variables. It is recommended there should be complementarity of fiscal policy and monetary policy carefully and appropriately, in order to avoid distortion in monetary policies implementation of the CBN in stabilizing the economy; government expenditure should be tailored to internal generated revenue, not oil-generating revenue; and government deposit in the financial sector is reduced as well as strengthen of treasury single account (TSA)policy to track government generated revenue may be a right policy for Nigeria financial sector.

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