Modelling Policy and Macroeconomic Shocks Transmission over the Oil-Bust Cycle in Nigeria: Evidence from the last four decades

Abstract

Abstract Given the susceptibility of the Nigerian economy to internal and external economic shocks, it became imperative to devise strategies for cushioning the effects on sectoral productivity. This study investigated the sensitivity sectors to the oil price and policy shocks evaluated the reactions of the policy space to oil price shocks, and gauged the responsiveness of key financial indicators to shocks emanating from the fiscal and monetary policy space, using annual time-series data from 1981 to 2020 (4 Decades). The study utilised the Vector Autoregression (VAR) framework, Forecast Variance Decomposition (FVD), and Impulse Response Function (IRF). Results showed that the agricultural and industrial sectors respond more to oil price and monetary shocks than fiscal shocks, while the service sector's response to these shocks is insignificant. The result confirms the existence of forward and backward linkages, particularly between the agricultural and industrial sectors. Moreover, the study established that monetary policy has a more significant reaction to global oil price shocks than fiscal policy. While interest rate spread and exchange rate are more responsive to fiscal shocks than monetary shocks, inflation is substantially driven by monetary shocks. The study highlights relevant policy options. JEL Classification: B23, C15, C36