An Investigation into the Crude Oil Price Pass-Through to Economic Growth in Nigeria

Abstract

This study evaluated oil price pass-through to economic growth in Nigeria. The motivation
for this study originated from the need to understand the transmission channels and mechanisms through
which sudden oil price changes affect economic output and to make recommendations on how to bring
about output sustainability. This study employed the new Hamilton Index within the Structural Vector
Autoregressive (SVAR) environment to investigate the responses of macroeconomic variables to
sudden changes in oil prices. It was observed that the structure of the variables in the transmission
process of these macroeconomic variables to endogenous and exogenous shocks play key roles in the
determination of the effectiveness of their influence on output growth. The study found that negative
oil price movements have a stronger effect on economic growth than any other forms of oil price
fluctuation. Interest rate and money supply were found to be effective macroeconomic policy in Nigeria
that has the capacity of efficiently driving economic output. The study concludes that oil price is
transmitted to economic output through the exchange rate, money supply and interest rate. The study
recommends that Nigeria should adopt aggressive monetary control measures whenever there are
positive or negative oil price shocks. Secondly, the interest rate should be efficiently used in times of
oil price movements in order to ensure that economic growth in Nigeria is not compromised.