This paper analyses Nigeria's exchange rates, inflation and productivity response to energy shocks.
The paper employs the impulse response function (IRF) and forecast error variance decomposition (FEVD) within the Structural Vector Autoregression model to estimate the responses of exchange rates, inflation and productivity to energy price shocks between 2003M01 and 2023M12.
The results reveal that energy shocks lead to a short-term appreciation of the naira and have a significantly positive impact on inflation in the short run. The IRF also indicates that energy shocks have a significant and adverse impact on productivity in the short term. Our results further indicate that, although energy shocks are pertinent, they are not the primary drivers of fluctuations in exchange rates, productivity and inflation in Nigeria. Exchange rates, inflation and productivity are susceptible to their past values.
The limitation of this study is the lack of high-frequency productivity data in Nigeria. Therefore, we employ a quadratic method to convert the annual data into monthly data.
This study adds evidence on how energy price changes are transmitted through macroeconomic channels in Nigeria and supports future research. Societally, it highlights the need for diversification and energy reforms. Policymakers should target inflation, stabilize the exchange rate and manage fiscal spending.
This paper fills a gap in the literature by using recent high-frequency data to examine the impact of energy price shocks on exchange rates, inflation and productivity in three key sectors of the Nigerian economy.
