Assymetric Effect of Oil Price Shocks on Exchange Rate Volatility and Domestic Investment in Nigeria

Abstract

Aim: The paper aimed at examining the asymmetric effect of oil price shock on exchange rate and domestic investment in Nigeria. Study Design: Country case study. Place and Duration of Study: Nigeria. Time series data ranging from 1970-2010. Methodology: This study utilised elaborate econometric analysis which tests the sensitivity of exchange rate, private investment, public investment, per capita income and industrial production to oil price shocks, using the Impulse Response Functions (IRFs) and Variance Decomposition (VDC) techniques within a Vector Autoregressive (VAR) framework. Results: The result clearly revealed that while government expenditure exhibited immediate positive response to oil price shock, public investment, private investment and industrial production exhibited negative response to oil price shock, further confirming the evidence of “Dutch disease” in Nigeria. The variance decomposition analysis further revealed that exchange rate, government expenditure and domestic investment were mainly affected by oil shock, particularly, in the short run. Conclusion: The study concludes that volatility in crude oil prices has negative impact on domestic investment and industrial development in Nigeria. It is recommended among other things in this study that the usual practice of sharing oil windfalls to the three tiers of government should be discouraged; rather, the central government should allocate these windfalls to priority sectors of the economy to enhance development.