Title:
OIL PRICE SHOCKS AND NIGERIAN GROSS DOMESTIC PRODUCT GROWTH; A BAYESIAN MARKOV SWITCHING VAR ANALYSIS

Authors:
B.O. IGANIGA, Ikubor, j.O., P.C.Uzomba, Nigeria

Abstract:

Asymmetric behaviour is one of the major characteristics of many macroeconomic and financial time series during different phases of a business cycle. On this basis, this study examined the role of oil price shocks in predicting phases of the Nigerian business cycle associated with higher and lower growth regimes. The study adopted a regime dependent approach to investigate the impact of oil price shocks under two phases of the business cycle, namely high and low growth regimes. Nigeria as a net exporter and importer of oil is expected to be vulnerable to the vagaries of oil price irrespective of the phase of the business cycle. A Bayesian Markov Switching Vector autoregressive (MS–VAR) model was employed on quarterly data spanning from 1970Q1 to 2019Q4. The results show that the probability to sustain high growth state is smaller compared to the low growth state hence the Nigerian economy growth over the years has been stunted. The regime dependent impulse response functions (IRFs) were able to differentiate between the responses of the real output to oil price shocks under each regime with low growth regime being statistically significant. The policy import of this analysis is that Nigeria’s vulnerability to future oil price shocks depends on the extent to which the non – oil domestic economy is reactivated to mitigate the full impact of the oil price shocks and the Concomitant Dutch Disease.