Abstract
This study examines the dependency between changes in crude oil price and 15 Nigerian macroeconomic variables. We employ a monthly time series data covering the period from January 2000 to December 2019 and recently refined feasible generalized least square estimator (FGLS) which has the advantage of fixing data problems such as persistency, endogeneity, and heteroscedasticity. The findings of the study shows that oil price changes could substantially predict 10 out of 15 dependent macroeconomic variables, namely all share index, exchange rate, interest rate, inflation, GDP, market capitalization, market capitalization/GDP ratio, net foreign asset, quasi money, and total foreign reserve. 7 out of these 10 significant macroeconomic variables respond to oil price change when the predicting horizon was varied for 4 different periods. However, oil did not substantially predict GDP in the out - of - sample forecast, but did in 3/4 of the in-sample forecast. Also, the null hypothesis of no predictability applies to the remaining 5 macroeconomic variables, namely, money supply 1, money supply 2, net domestic credit, currency in circulation and demand deposit. We recommend the need for consistent monitoring of oil price behavior by regulators so as to counteract its adverse effects by the use of monetary policy and to also intensify the diversification process of other sectors of the economy.
Keywords:
Crude oil price, GDP, Volatility, Macroeconomic variables, Predictability, FGLS.How to Cite
Kamah, M. ., & Riti, J. S. (2020). Dissecting the Linkages between Variations in Crude Oil Price and Selected Macroeconomic Variables in Nigeria. Journal of Contemporary Research in Business, Economics and Finance, 2(2), 37–46. https://doi.org/10.33094/26410265.2020.22.37.46
References
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Ahmed, K., Bhutto, N. A., & Kalhoro, M. R. (2019). Decomposing the links between oil price shocks and macroeconomic indicators: Evidence from SAARC region. Resources Policy, 61, 423-432. Available at: https://doi.org/10.1016/j.resourpol.2018.03.001.
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Cheung, Y.-W., & Ng, L. K. (1998). International evidence on the stock market and aggregate economic activity. Journal of Empirical Finance, 5(3), 281-296. Available at: https://doi.org/10.1016/s0927-5398(97)00025-x.
Clarida, R., Gali, J., & Gertler, M. (2000). Monetary policy rules and macroeconomic stability: Evidence and some theory. The Quarterly Journal of Economics, 115(1), 147-180. Available at: https://doi.org/10.1257/aer.100.1.491.
Cunado, J., & DeGracia, F. P. (2005). Oil prices, economic activity and inflation: Evidence for some Asian countries. The Quarterly Review of Economics and Finance, 45(1), 65–83. Available at: https://doi.org/10.1016/j.qref.2004.02.003.
Eryiğit, M. (2012). The dynamical relationship between oil price shocks and selected macroeconomic variables in Turkey. Economic Research-Ekonomska istraživanja, 25(2), 263-276. Available at: 10.1080/1331677X.2012.11517507.
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Hamilton, J. D. (1996). This is what happened to the oil price-macroeconomy relationship. Journal of Monetary Economics, 38(2), 215-220. Available at: https://doi.org/10.1016/s0304-3932(96)01282-2.
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Iwayemi, A., & Fowowe, B. (2011). Impact of oil price shocks on selected macroeconomic variables in Nigeria. Energy Policy, 39(2), 603-612. Available at: https://doi.org/10.1016/j.enpol.2010.10.033.
Jawad, M., & Niazi, G. S. K. (2017). Impact of oil price volatility and macroeconomic variables on economic growth of Pakistan. Review of Innovation and Competitiveness: A Journal of Economic and Social Research, 3(1), 49-74. Available at: https://doi.org/10.32728/ric.2017.31/3.
Lardic, S., & Mignon, V. (2008). Oil prices and economic activity: An asymmetric cointegration approach. Energy Economics, 30(3), 847-855. Available at: https://doi.org/10.1016/j.eneco.2006.10.010.
Morana, C. (2017). Macroeconomic and financial effects of oil price shocks: Evidence for the euro area. Economic Modelling, 64, 82-96. Available at: 10.1016/j.econmod.2017.03.016.
Mork, K. A. (1989). Oil and the macroeconomy when prices go up and down: an extension of Hamilton's results. Journal of Political Economy, 97(3), 740-744. Available at: https://doi.org/10.1086/261625.
Papapetrou, E. (2001). Oil price shocks, stock market, economic activity and employment in Greece. Energy Economics, 23(5), 511-532. Available at: https://doi.org/10.1016/s0140-9883(01)00078-0.
Phoong, S. W., & Phoong, S. Y. (2019). An ARDL approach on crude oil price and macroeconomic variables. Journal of Business and Economics Review, 4(1), 68-73.
Rautava, J. (2004). The role of oil prices and the real exchange rate in Russia's economy—a cointegration approach. Journal of Comparative Economics, 32(2), 315-327. Available at: https://doi.org/10.1016/j.jce.2004.02.006.
Richard, J. C., & Michael, F. (1980). Oil imports and inflation: An empirical international analysis of the ‘imported’inflation thesis. Kyklos, 33(4), 615-622. Available at: https://doi.org/10.1111/j.1467-6435.1980.tb00716.x.
Sanusi, S. L. (2012). Global financial meltdown and the reforms in the Nigerian Banking sector. CBN Journal of Applied Statistics, 2(1), 93-108.
Shahbaz, M., Naeem, M., Ahad, M., & Tahir, I. (2018). Is natural resource abundance a stimulus for financial development in the USA? Resources Policy, 55, 223-232. Available at: https://doi.org/10.1016/j.resourpol.2017.12.006.
Sharma, S. S., Phan, D. H. B., & Iyke, B. (2019). Do oil prices predict Indonesian macroeconomy? Economic Modelling, 82, 2-12. Available at: https://doi.org/10.1016/j.econmod.2019.08.008.
Sill, K. (2007). The macroeconomics of oil shocks. Federal Reserve Bank of Philadelphia, Business Review, 1(1), 21-31.
Tatom, J. A. (1988). Are the macroeconomic effects of oil-price changes symmetric? Paper presented at the Carnegie-Rochester Conference Series on Public Policy.
Twin, A. (2019). World's top 10 oil exporters. Retrieved from: https://www.investopedia.com/articles/company-insights/082316/.
Westerlund, J., & Narayan, P. (2015). Testing for predictability in conditionally heteroskedastic stock returns. Journal of Financial Econometrics, 13(2), 342-375. Available at: https://doi.org/10.1093/jjfinec/nbu001.
Westerlund, J., & Narayan, P. K. (2012). Does the choice of estimator matter when forecasting returns? Journal of Banking & Finance, 36(9), 2632-2640. Available at: https://doi.org/10.1016/j.jbankfin.2012.06.005.
World Integrated Trade Solution WITS. (2019). Nigeria trade statitics. Retrieved from: https://wits.worldbank.org/CountryProfile/en/Country/NGA/Year/LTST/Summary.
Abeysinghe, T. (2001). Estimation of direct and indirect impact of oil price on growth. Economics Letters, 73(2), 147-153. Available at: https://doi.org/10.1016/s0165-1765(01)00476-1.
Ahmed, K., Bhutto, N. A., & Kalhoro, M. R. (2019). Decomposing the links between oil price shocks and macroeconomic indicators: Evidence from SAARC region. Resources Policy, 61, 423-432. Available at: https://doi.org/10.1016/j.resourpol.2018.03.001.
Amano, R. A., & Van Norden, S. (1998). Oil prices and the rise and fall of the US real exchange rate. Journal of International Money and FFinance, 17(2), 299-316. Available at: https://doi.org/10.1016/s0261-5606(98)00004-7.
Bernanke, B. S. (1983). Non-monetary effects of the financial crisis in the propagation of the Great Depression: National Bureau of Economic Research Cambridge, Mass, USA.
Bernanke., B. S., Gertler, M., Watson, M., Sims, C. A., & Friedman, B. M. (1997). Systematic monetary policy and the effects of oil price shocks. Brookings Papers on Economic Activity, 1997(1), 91-157. Available at: https://doi.org/10.2307/2534702.
Cheung, Y.-W., & Ng, L. K. (1998). International evidence on the stock market and aggregate economic activity. Journal of Empirical Finance, 5(3), 281-296. Available at: https://doi.org/10.1016/s0927-5398(97)00025-x.
Clarida, R., Gali, J., & Gertler, M. (2000). Monetary policy rules and macroeconomic stability: Evidence and some theory. The Quarterly Journal of Economics, 115(1), 147-180. Available at: https://doi.org/10.1257/aer.100.1.491.
Cunado, J., & DeGracia, F. P. (2005). Oil prices, economic activity and inflation: Evidence for some Asian countries. The Quarterly Review of Economics and Finance, 45(1), 65–83. Available at: https://doi.org/10.1016/j.qref.2004.02.003.
Eryiğit, M. (2012). The dynamical relationship between oil price shocks and selected macroeconomic variables in Turkey. Economic Research-Ekonomska istraživanja, 25(2), 263-276. Available at: 10.1080/1331677X.2012.11517507.
Hamilton, J. D. (1983). Oil and the macroeconomy since World War II. Journal of Political Economy, 91(2), 228-248. Available at: https://doi.org/10.1086/261140.
Hamilton, J. D. (1996). This is what happened to the oil price-macroeconomy relationship. Journal of Monetary Economics, 38(2), 215-220. Available at: https://doi.org/10.1016/s0304-3932(96)01282-2.
Issa, R., Lafrance, R., & Murray, J. (2008). The turning black tide: Energy prices and the Canadian dollar. Canadian Journal of Economics/Revue canadienne d'économique, 41(3), 737-759. Available at: https://doi.org/10.1111/j.1540-5982.2008.00483.x.
Iwayemi, A., & Fowowe, B. (2011). Impact of oil price shocks on selected macroeconomic variables in Nigeria. Energy Policy, 39(2), 603-612. Available at: https://doi.org/10.1016/j.enpol.2010.10.033.
Jawad, M., & Niazi, G. S. K. (2017). Impact of oil price volatility and macroeconomic variables on economic growth of Pakistan. Review of Innovation and Competitiveness: A Journal of Economic and Social Research, 3(1), 49-74. Available at: https://doi.org/10.32728/ric.2017.31/3.
Lardic, S., & Mignon, V. (2008). Oil prices and economic activity: An asymmetric cointegration approach. Energy Economics, 30(3), 847-855. Available at: https://doi.org/10.1016/j.eneco.2006.10.010.
Morana, C. (2017). Macroeconomic and financial effects of oil price shocks: Evidence for the euro area. Economic Modelling, 64, 82-96. Available at: 10.1016/j.econmod.2017.03.016.
Mork, K. A. (1989). Oil and the macroeconomy when prices go up and down: an extension of Hamilton's results. Journal of Political Economy, 97(3), 740-744. Available at: https://doi.org/10.1086/261625.
Papapetrou, E. (2001). Oil price shocks, stock market, economic activity and employment in Greece. Energy Economics, 23(5), 511-532. Available at: https://doi.org/10.1016/s0140-9883(01)00078-0.
Phoong, S. W., & Phoong, S. Y. (2019). An ARDL approach on crude oil price and macroeconomic variables. Journal of Business and Economics Review, 4(1), 68-73.
Rautava, J. (2004). The role of oil prices and the real exchange rate in Russia's economy—a cointegration approach. Journal of Comparative Economics, 32(2), 315-327. Available at: https://doi.org/10.1016/j.jce.2004.02.006.
Richard, J. C., & Michael, F. (1980). Oil imports and inflation: An empirical international analysis of the ‘imported’inflation thesis. Kyklos, 33(4), 615-622. Available at: https://doi.org/10.1111/j.1467-6435.1980.tb00716.x.
Sanusi, S. L. (2012). Global financial meltdown and the reforms in the Nigerian Banking sector. CBN Journal of Applied Statistics, 2(1), 93-108.
Shahbaz, M., Naeem, M., Ahad, M., & Tahir, I. (2018). Is natural resource abundance a stimulus for financial development in the USA? Resources Policy, 55, 223-232. Available at: https://doi.org/10.1016/j.resourpol.2017.12.006.
Sharma, S. S., Phan, D. H. B., & Iyke, B. (2019). Do oil prices predict Indonesian macroeconomy? Economic Modelling, 82, 2-12. Available at: https://doi.org/10.1016/j.econmod.2019.08.008.
Sill, K. (2007). The macroeconomics of oil shocks. Federal Reserve Bank of Philadelphia, Business Review, 1(1), 21-31.
Tatom, J. A. (1988). Are the macroeconomic effects of oil-price changes symmetric? Paper presented at the Carnegie-Rochester Conference Series on Public Policy.
Twin, A. (2019). World's top 10 oil exporters. Retrieved from: https://www.investopedia.com/articles/company-insights/082316/.
Westerlund, J., & Narayan, P. (2015). Testing for predictability in conditionally heteroskedastic stock returns. Journal of Financial Econometrics, 13(2), 342-375. Available at: https://doi.org/10.1093/jjfinec/nbu001.
Westerlund, J., & Narayan, P. K. (2012). Does the choice of estimator matter when forecasting returns? Journal of Banking & Finance, 36(9), 2632-2640. Available at: https://doi.org/10.1016/j.jbankfin.2012.06.005.
World Integrated Trade Solution WITS. (2019). Nigeria trade statitics. Retrieved from: https://wits.worldbank.org/CountryProfile/en/Country/NGA/Year/LTST/Summary.
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