Oil Price Shocks and Nigeria’s Macroeconomy: Disentangling the Dynamics of Crude Oil Market Shocks

Previous empirical literature on the oil price shocks–macroeconomy relationship was hinged on the implicit premise that oil price shocks originated exclusively from exogenous supply shock to the crude oil market. Recent research by Kilian (2009) shows that oil price shocks are endogenous outcomes of the underlying demand and supply shocks in the crude oil market. Based on a two-stage approach, this article investigates the effects of demand and supply shocks in the crude oil market on Nigeria’s macroeconomy for the period 1986–2011. Using a structural vector autoregressive (SVAR) model, oil price shocks are disentangle into three components: oil supply shocks, aggregate demand shocks and oil-specific demand shocks. The three shocks are recovered in the first analysis and conditioned on selected macroeconomic variables within a VAR framework in the second stage. The impulse response analysis shows that the macroeconomic aggregates are associated with different response pattern to each type of oil price shocks. However, their relative importance shows marginal effects.