External Sector Responses to Oil Price Shocks: A Structural System Model for Nigeria

This study critically examines the effects of specific exogenous shocks—oil price shocks on Nigeria’s external sector. Employing a Structural Macroeconomic Model (SMM) comprising of ten behavioural equations and four identities with quarterly data spanning from 1981 to 2015, the SMM simulations of the external sector found that oil price shocks do have significant impacts on the components of Nigeria’s external sector. Specifically, while oil price shocks elicited varying responses from all components of Nigeria’s external sector components, the simulated results showed very limited evidence of asymmetry in the responses to both positive and negative oil price shocks. For policy, the simulated responses of capital financial flows, foreign debt flows, imports, nominal exchange rates, reserves, remittances, and capital financial flows, reflect the over-dependence of the Nigerian economy on crude oil, and the justifiable need to diversify the Nigerian economy away from the oil sector.