Oil price pass-through into inflation: empirical evidence from Nigeria.

Abstract

The petroleum industry is a major driver of the Nigerian economy. Its importance has become even more noticeable in terms of its revenue generation capability for economic development as well as the multiplier effects of its downstream activities. However, due to its global significance, the sector has experienced fundamental changes and challenges. Against this background, this work is motivated by the fact that Nigeria relies heavily on crude oil export revenues, which represents about 90.0 per cent of total export earnings and on average about 70.0 per cent of government revenues in its annual budgets, thereby making it vulnerable to the vagaries of the international oil market. The monetisation of these oil proceeds affect money supply and consequently, the general price level. The objective of the paper therefore is to empirically investigate the oil price pass-through into inflation in Nigeria in order to suggest appropriate domestic policies necessary to control inflation for the policy makers. The study also attempts to answer questions like: What is the causal links between oil price and inflation in Nigeria? Is oil price highly correlated with inflation? What does the result of an estimation of a Phillips curve tell us about the pass-through for oil in Nigeria. The methodology adopted by the paper is a standard pass-through equation in the form of an autoregressive distributed lag (ARDL) model and quarterly series from 1990 - 2010 were used for the estimation. The estimation results indicate that changes in oil price have had significant effects on inflation. Other findings are that inflation has been influenced by exchange rate changes and changes in broad money supply and maximum lending rate.