“Can an Apple Fall Far from its Tree?”Macroeconomic Effects of Oil on a Net Exporting Country

Abstract

This paper investigates the effects of oil on macroeconomic performance of an oil-dependent country. It uses data on Nigeria's economy which has been heavily dependent on oil for over four decades. The paper uses threshold vector autoregressive (VAR) techniques, which identifies two regimes of low and high oil prices and oil revenues. The VAR analysis follows the standard open-economy literature in identifying the shocks into demand, nominal, and supply shocks. The results indicate that oil revenue shocks are the most important source of the GDP variation in the high regime while supply shocks dominate in the low regime. Government and household consumptions depict an inverse relationship which suggest that the country can benefit from countercyclical fiscal policy, especially in a situation where slump in economic activities is driven by collapse in private consumption and can be funded from a buffer that can be built during the period of high regime, especially in oil revenues created by a boom.

Keywords: Oil revenue, macroeconomic performance, Threshold VAR