Impact of Global Oil Market Shocks on Macroeconomic Variables in Nigeria: An SVAR Approach

Abstract

This study examines the effects of structural shocks in the global oil market on Nigeria’s key macroeconomic variables. Recognising that oil price movements reflect diverse underlying forces, the analysis distinguishes between oil supply shocks, aggregate demand shocks, and oil-specific demand shocks. Using a Structural Vector Autoregressive (SVAR) framework following Kilian (2009), the study traces how each category of global oil shock transmits to Nigeria’s exchange rate and economic activity. The methodology incorporates Augmented Dickey-Fuller, Phillips-Perron, and Zivot-Andrews unit root tests, alongside Johansen, Gregory-Hansen, and Hatemi-J cointegration procedures to account for potential structural breaks in the data. Dynamic responses are assessed using impulse response functions and variance decompositions. The empirical results indicate that variations in oil prices are primarily driven by global real economic activity and oil-specific demand shocks, while supply-side disruptions exert minimal influence. Both global demand and oil-specific shocks significantly affect Nigeria’s exchange rate and economic activity, but no long-run cointegration is found among the variables. The analysis further reveals the absence of a meaningful pass-through between the exchange rate and domestic output. These findings suggest that, over the sample period, Nigeria’s exchange rate and stock-market-based activity indicator were sensitive to external oil-market conditions, while the estimated exchange-rate–activity linkage appeared weak within the SVAR framework. The study concludes that policy efforts should prioritise structural diversification and productivity-enhancing reforms to reduce exposure to oil market volatility and strengthen macroeconomic resilience.