The Asymmetric Impact of Oil Price Volatility on Nigeria's Inflation

Abstract

Nigeria, as one of the top exporters of crude oil worldwide, is heavily reliant on revenue generated from oil exports through aggregate export earnings. In addition, the Nigerian economy's reliance on crude oil revenues as a key source of income prompts worries about the influence of oil price volatility on macroeconomic indicators. This paper empirically examines the asymmetric effect of oil price volatility on inflation in Nigeria. Using annual time series data for the years 1980 to 2020, the study used the Nonlinear Autoregressive Distributive lag Model, the empirical evidence from the asymmetric analysis shows that the rise in oil prices, interest rates, and real effective exchange rate tends to lessen inflationary pressures in the country. On the other hand, the fall in oil prices, interest rates, and real effective exchange rates have a greater impact on exacerbating Nigeria's inflationary pressures. However, it was discovered that negative oil price shocks have a larger and more significant impact on inflation than positive oil price shocks. The study recommends that the Nigerian government needs to diversify away from oil as a main source of revenue and instead focus on other sectors such as services, agriculture, and manufacturing. It also suggests that the central bank of Nigeria should focus its efforts on controlling other macroeconomic variables that cause inflation in the country while maintaining exchange rate stability through the implementation of effective monetary policy measures.

Keywords

• oil price shock
• inflation
• interest rate
• exchange rate
• nonlinear autoregressive distributed lag