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EFFECT OF OIL PRICE AND EXCHANGE RATE VOLATILITY ON ECONOMIC GROWTH IN NIGERIA
Abstract
Controversies abound over the nexus between oil price and exchange rate volatility on economic growth. However, previous related studies in Nigeria only focused on either the impact of oil price shock on economic growth or the effect of exchange rate volatility on economic growth without examining the joint effect of the two variables on economic growth. The study equally examined the dynamic relationship that exists among oil price, exchange rate volatility and economic growth in Nigeria. Secondary data were used for this study. The variables are real gross domestic product, exchange rate, money supply and inflation rate which were sourced from Central Bank of Nigeria (CBN) Statistical Bulletin, while oil price was sourced from energy price indicator. The econometric techniques employed were co-integration analysis and vector autoregressive model. The result showed that oil price volatility has negative but insignificant relationship with economic growth as 1 per cent increase in oil price volatility reduces real gross domestic product by 1.7 per cent. In the same vein, exchange rate volatility has insignificant adverse effect on real GDP as 1 percent increase in exchange rate volatility brings about 2.6 per cent decrease in real GDP. The study concluded that oil price volatility
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depresses economic growth more than volatility in exchange rate, a scenario that may attribute to mismanagement of oil revenue in the country. Based on the findings of this study, it was recommended that there should be a reduction in the proportion of expenditure on imported commodities by Nigerians and urges them to patronise locally made goods.
Keywords: Oil Price, Exchange Rate, Economic Growth, Impulse Response, Variance Decomposition