EFFECTS OF FLUCTUATIONS IN OIL PRICE ON MACROECONOMIC VARIABLES IN NIGERIA Olaide Kayode Emmanuel, Carleton University Ottawa, Canada 34TH USAEE/IAEE NORTH AMERICAN CONFERENCE, TULSA, OKLAHOMA. OCTOBER 24, 2016

AIM AND SIGNIFICANCE The purpose of this study is to re-examine how the volatility in oil prices impacts on the Nigerian economy, as an energy-dependent economy and a major world producer and exporter of oil using certain key macroeconomic variables Output, interest rate, inflation rate, unemployment rate, money supply, government expenditure and exchange rate Since the discovery of oil in commercial quantities in Nigeria, oil has become the main stay of the Nigerian economy

LITERATURE REVIEW Hamilton’s (1983); Burbidge and Harrison (1984) Lescaroux and Mignon (2008); LeBlanc and Chinn (2004) Gisser and Goodwin (1986); Ferderer (1996); Carruth, Hooker and Oswald (1998) and Hooker (2002); Guo and Kliesen (2005) Lardic and Mignon (2006); Narayan and Narayan (2007); Narayan and Narayan (2007); Cologni and Manera (2009); Elder and Serletis (2010) Ahmed and Wadud (2011); Jo (2013); Salim and Rafiq (2013) Gunu and Kilishi (2010); Iwayemi and Fowowe (2010); Iwayemi and Fowowe (2010); Demachi (2012); Apere and Ijomah (2013)

METHODOLOGY Autoregressive distributed lag (ARDL) model: ∆ 𝑂𝑃 𝑡 = µ 1 + 𝑠=0 𝑛 𝛾 1,𝑠 ∆ 𝑂𝑃 𝑡−𝑠 + 𝑠=0 𝑛 𝛾 2,𝑠 ∆ 𝑀𝑉 𝑡−𝑠 + 𝛿 1 𝑂𝑃 𝑡−1 + 𝛿 2 𝑀𝑉 𝑡−1 + 𝜂 1,𝑡 (1) ∆ 𝑀𝑉 𝑡 = µ 2 + 𝑠=0 𝑛 𝜃 1,𝑠 ∆ 𝑂𝑃 𝑡−𝑠 + 𝑠=0 𝑛 𝜃 2,𝑠 ∆ 𝑀𝑉 𝑡−𝑠 + 𝜋 1 𝑂𝑃 𝑡−1 + 𝜋 2 𝑀𝑉 𝑡−1 + 𝜂 2,𝑡 (2) Vectorautoregressive (VAR) model Vector Error Correction Model (VECM) Impulse Response Functions and Forecast Error Variance Decomposition

Results of unit roots test VARIABLE ADF DF-GLS RGDP 0.313 -0.325 MS 2.717 -1.169 INTR -1.869 -1.221 INFR -3.65 -3.623 UNEMPR -0.166 -0.727 EXCR -1.849 -1.333 GEXP 2.39 -1.201 OP -1.028 -1.179 DRGDP -4.4 -4.352 DMS -4.214 -3.645 DINTR -7.438 -7.336 DINFR -6.497 -6.581 DUNEMPR -3.835 -3.764 DEXCR -4.197 -4.137 DGEXP -3.943 -3.75 DOP -5.795 -5.61 *The critical values of t-statistics for the ADF are -3.528 and -3.197 (and that of DFGLS, -3.231 and-2.923) at 5% and 10% level of significance respectively

Results of ARDL cointegration estimation   VARIABLE F-STATISTICS RGDP/OP 1.38 OP/RGDP 0.79 MS/OP 10.66 OP/MS 1.46 INTR/OP 1.44 OP/INTR 0.36 INFR/OP 1.55 OP/INFR 0.42 UNEMPR/OP 1.62 OP/UNEMPR 1.48 EXCR/OP 0.06 OP/EXCR 1.69 GEXP/OP 5.81 OP/GEXP 1.57 *The critical value ranges of F-statistics are 3.96-4.53 and 3.21-3.74 at 5% and 10% level of significance respectively [Paresh Kumar Narayan (2005)].

Results for the VAR Granger causality Wald tests Equation Excluded chi2 df Prob > chi2 D_OP D.RGDP 0.16964 1 0.68 ALL D_RGDP D.OP 2.3844 0.123

Results for the VAR Granger causality Wald tests Equation Excluded chi2 df Prob > chi2 OP INTR .37504 1 0.540 ALL .17277 0.678

Results for the VAR Granger causality Wald tests Equation Excluded chi2 df Prob > chi2 OP INFR .22812 1 0.633 ALL .80123 0.371

Results for the VAR Granger causality Wald tests Equation Excluded chi2 df Prob > chi2 D_OP D.UNEMPR .07546 1 0.784 ALL D.OP .16813 0.682

Results for the VAR Granger causality Wald tests Equation Excluded chi2 df Prob > chi2 D_OP D.EXCR 2.3068 1 0.129 ALL D.OP .03163 0.859

Test results for the VECMs VARIABLE chi2 Prob > chi2 ECT t-STATISTIC P>|t| OP/MS 2.071987 0.3549 -0.6 0.549 MS/OP 99.00253 0.0000 8.31 0.000 OP/GEXP 1.698612 0.4277 0.03 0.978 GEXP/OP 45.88497 4.96

MODEL SPECIFICATION TEST Parameter instability test for DOP versus DRGDP VAR specification

Parameter instability test for OP versus INTR VAR specification

Parameter instability test for OP versus INFR VAR specification

Parameter instability test for DOP versus DUNEMPR VAR specification

Parameter instability test for DOP versus DEXCR VAR specification

Parameter instability test for OP versus MS VEC specification

Results of IRFs For the VAR models, the IRF dies out for each the variables real GDP, interest rate, inflation rate, unemployment rate, and exchange rate; confirming the results that the oil price has no impact on these variables. For the VEC models, the IRF shows that a shock to the oil price has a permanent effect on each of the variables money supply and government expenditure.

Results of FEVD The results show that none of the forecast error variance in each of the real GDP, interest rate, inflation rate, unemployment rate, and exchange rate is attributable to the shock in oil price. A greater proportion of the forecast error variance in each of the money supply and government expenditure is due to the shock in oil price.

Forecasting with the VAR and VEC models Based on this models, predicted at the levels of the variables, the oil price will rise first, and then remain constant at less than US$100 per barrel At the first difference forecast, the figure shows that the oil price will rise first, then falls and remain constant around less than US$10 per barrel The real GDP is expected to fall and then remain constant at less than fifty billion naira into the distant future. The interest rate is expected to rise and then remain constant at twenty percent into the distant future.

Forecasting with the VAR and VEC The inflation rate is expected to rise and then remain constant around ten percent into the distant future. The unemployment rate is expected to fall and then remain constant at less than two percent into the distant future. The exchange rate is expected to rise and then remain constant at less than ten percent into the distant future. The money supply is expected to increase perpetually into the distant future. The government expenditure is expected to increase perpetually into the distant future.

CONCLUSION AND POLICY IMPLICATIONS Nigeria has not used the huge revenue realized from its oil and gas sector during the period of oil windfalls and rising oil prices to grow its economy Inflation in Nigeria is a monetary phenomenon as a response of the domestic price levels to the increase in money supply, which responds to oil price. It is therefore suggested that Nigeria needs to diversify its economy and sources of revenue; maintain prudent fiscal management and fiscal discipline; make the governmental institutions, agencies and parastatals more transparent at all tiers of government, and curb corruption and financial misappropriation, especially in the oil and gas sector of the economy.

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