OIL Price Volatility and Trade Balance: Cointegration and Causality Analysis in Nigeria
Author: Adebayo Shereefdeen Kunle, Nigeria
Abstract: The paper empirically examines the co-integration and causality between oil price volatility and trade balance in Nigeria. The Granger causality test within the Vector Error-Correction Model (VECM) was conducted to examine the direction of causality. The secondary quarterly data covering the period of 1990Q1 and 2014Q4 were employed. The results show the existence of short-run unidirectional causality running from oil price volatility to trade balance, from real exchange rate to trade balance and from trade balance to inflation rate in Nigeria. At the same time, a long-run bidirectional causal relation is also found running from oil price volatility, real exchange rate and inflation rate to trade balance, and from trade balance, oil price volatility and real exchange rate to inflation rate. The findings show that overreliance on crude oil by Nigeria as the main export commodity will continue to subject the country’s trade balance position to fluctuations in the price of crude oil at the world market. Moreover, floating exchange rate policy may also affect Nigeria’s trade position adversely being an economy that imports factually everything she consumes