Transmission mechanisms of oil price shock to inflation in Nigeria

This study focused on analyzing the transmission mechanism of oil price shocks to inflation in Nigeria, using data from 1990 to 2024. It employed both the dynamic ordinary least squares (DOLS) estimation and the vector autoregression (VAR) model. The findings from the DOLS confirmed that oil price shocks directly influenced inflation in Nigeria. Additionally, the results indicated that exchange rate volatility, money supply, and fiscal balance also directly affected inflation. The impulse response function from the VAR model showed that inflation responded positively to shocks in oil prices. Furthermore, fiscal balance and money supply responded positively to oil price shocks, although the effects were decomposed over the long term. It was observed that inflation responded positively to shocks in broad money supply and fiscal balance during the study period. These findings reflect the presence of petro-monetary and petro-fiscal transmission mechanisms of oil price shocks to inflation in Nigeria. The study concludes that oil price shocks impact both the monetary and fiscal sectors of the economy, making them essential considerations in monetary and fiscal policy formulation aimed at addressing inflation in Nigeria.