RESOURCE DEPENDENCE AND MACROECONOMIC ADJUSTMENT: A VAR ANALYSIS OF OIL PRICE SHOCKS IN NIGERIA

Abstract

Nigeria’s heavy reliance on oil revenue makes its economy highly vulnerable to fluctuations in global oil prices, often triggering inflationary pressures and unstable growth. This study investigates the macroeconomic adjustment mechanisms to oil price shocks in Nigeria from 1994 to 2023, addressing the gap in empirical evidence on how oil dependence shapes domestic price and interest rate responses. Using a Vector Auto regression (VAR) model with quarterly data on oil price (OPC), real gross domestic product (RGDP), inflation rate (INF), and interest rate (INT) from the Central Bank of Nigeria, the study applies unit root and stability diagnostics, impulse response functions, and variance decomposition to capture both short- and long-run dynamics. Results indicate that oil price shocks significantly increase inflation and interest rates (p < 0.05), while RGDP responds positively to oil price changes at lag 3 before declining in later periods. Inflation negatively affects RGDP at lags 2–3, confirming short-term overheating effects. The model explains 78% of RGDP, 71% of inflation, 80% of interest rate, and 70% of oil price variations, affirming strong predictive power. These findings support the resource dependence theory and Dutch Disease hypothesis, revealing that oil-driven growth amplifies macroeconomic volatility The study recommends economic diversification, fiscal savings for future shocks, and reforms to boost agriculture and manufacturing. Prudent management of government spending and interest rates is essential to ensure price stability and long-term growth.