Structural Oil Market Shocks, Exchange Rate Dynamics, and Market-Based Economic Activity in Nigeria: Evidence from SVAR and NARDL Models

Abstract

This study examines how structurally identified global oil market shocks influence market-based economic activity in Nigeria, with attention to exchange-rate dynamics and asymmetric transmission. Monthly data from January 1999 to April 2026 were analysed using a Structural Vector Autoregressive model and a Nonlinear Autoregressive Distributed Lag framework. Oil price movements were decomposed into oil supply shocks, aggregate demand shocks and oil-specific demand shocks, while exchange rate shocks were incorporated as a domestic transmission channel. Unit root and cointegration properties were assessed using conventional and structural-break procedures before estimating the structural and nonlinear models. Historical decomposition shows that oil-specific demand shocks were the largest contributor to oil price fluctuations, followed by aggregate demand shocks, whereas oil supply shocks made a smaller contribution. The NARDL estimates indicate that oil supply shocks, aggregate demand shocks and exchange rate shocks are statistically associated with market-based economic activity in both the short run and the long run. Oil-specific demand shocks are significant only in the short run, suggesting a mainly transitory influence. Wald symmetry tests show that asymmetry is not a pervasive long-run feature of the relationship. Instead, short-run asymmetry emerges through aggregate demand shocks, indicating that favourable and unfavourable global demand conditions are transmitted with different magnitudes and persistence. The findings suggest that Nigeria’s exposure to external oil-market disturbances is shaped by the structural sources of oil price movements and by exchange-rate adjustment, rather than by oil price changes alone.