Unrestricted Vector Autoregressive Modelling of the Interaction among Oil Price, Exchange Rate and Inflation in Nigeria (1981–2017)

Main Article Content

G. L. Tuaneh
L. Wiri

Abstract

The interdependence among oil prices, exchange rates and inflation rates, and their response to shocks, was a cause of concern. Unrestricted Vector Autoregression (UVAR) was employed to analyse this interactions as well as to investigate the pattern of causality among the study variable. Annual data spanning from 1981 to 2017 was sourced from the Statistical Bulletin of the Central Bank of Nigeria. Pre-estimation analysis showed that all variables were integrated of order one 1(1), and there no cointegrating relationship. The inverse root of AR characteristic polynomial showed a stable VAR model. All lag length selection criteria chose a lag length of 1. The UVAR estimates and the test of significance particularly the granger causality test indicated significant influence and uni-directional effect from oil price to exchange rates. The Wald statistics, showed significant own shocks, and the impulse response showed that all variables were instantaneously affected by own shocks. Exchange rate was instantaneously affected by oil price; however, it ruled out the response in inflation rate to contemporaneous shocks in oil price. The variance decomposition further showed that at least 93.1%, 97.1% and 92.4% of the impulse response in oil price, exchange rate, and inflation rate respectively were from own shocks in the long run. The post estimation analysis showed that the VAR model was multivariate normal, the residual was homoscedastic, and there was no serial autocorrelation. It was recommended that the government should diversify the national income stream and consider policies that will control inflation.

Keywords:
Oil price, exchange rate, inflation rate, VAR, impulse response, variance decomposition

Article Details

How to Cite
Tuaneh, G. L., & Wiri, L. (2019). Unrestricted Vector Autoregressive Modelling of the Interaction among Oil Price, Exchange Rate and Inflation in Nigeria (1981–2017). Asian Journal of Probability and Statistics, 2(4), 1-19. https://doi.org/10.9734/ajpas/2018/v2i429946
Section
Original Research Article