Omotosho, Babatunde S. (2020): Oil price shocks, fuel subsidies and macroeconomic (in)stability in Nigeria. Published in: CBN Journal of Applied Statistics , Vol. 10, No. 2 (December 2019): pp. 1-38.
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Abstract
This paper studies the macroeconomic implications of oil price shocks and the extant fuel subsidy regime for Nigeria. To do this, we develop and estimate a New-Keynesian DSGE model that accounts for pass-through effect of international oil price into the retail price of fuel. Our results show that oil price shocks generate significant and persistent impacts on output, accounting for about 22 percent of its variations up to the fourth year. Under our benchmark model (i.e. with fuel subsidies), we show that a negative oil price shock contracts aggregate GDP, boosts non-oil GDP, increases headline inflation, and depreciates the exchange rate. However, results generated under the model without fuel subsidies indicate that the contractionary effect of a negative oil price shock on aggregate GDP is moderated, headline inflation decreases, while the exchange rate depreciates more in the short-run. Counterfactual simulations also reveal that fuel subsidy removal leads to higher macroeconomic instabilities and generates non-trivial implications for the response of monetary policy to an oil price shock. Thus, this study cautions that a successful fuel subsidy reform must necessarily encompass the deployment of well-targeted safety nets as well as the evolution of sustainable adjustment mechanisms.
Item Type: | MPRA Paper |
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Original Title: | Oil price shocks, fuel subsidies and macroeconomic (in)stability in Nigeria |
Language: | English |
Keywords: | Fuel subsidies, oil price shocks, business cycle |
Subjects: | E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy |
Item ID: | 105464 |
Depositing User: | Mr Babatunde S Omotosho |
Date Deposited: | 25 Jan 2021 02:50 |
Last Modified: | 25 Jan 2021 02:50 |
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URI: | https://mpra.ub.uni-muenchen.de/id/eprint/105464 |