Oil Price Shocks, Monetary Policy Transmission and Exchange Rate Stability in Nigeria
Abstract
This study investigates the empirical effects of global oil price shocks on core monetary policy transmission channels and exchange rate stability in Nigeria, utilizing selected net oil-importing and net oil-exporting African economies as a comparative baseline. Grounded in the theoretical framework of the Real Business Cycle (RBC) model, the study employs an Autoregressive Distributed Lag (ARDL) framework and accounts for potential structural non-linearities using the Asymmetric or Nonlinear ARDL (NARDL) approach. The empirical analysis utilizes three core operational targets of monetary policy as dependent variables: The Monetary Policy Rate (MPR), Broad Money Supply (MS), and the Prime Lending Rate (PLR). The results reveal significant structural asymmetries based on net energy trade profiles. In net oil-exporting nations like Nigeria, the Error Correction Term (ECT) is negative and statistically significant, indicating a stable long-run equilibrium adjustment rate of approximately 15.3%. Furthermore, global oil price innovations exert a positive and statistically significant impact on the MPR in both the short and long run within exporting economies, highlighting systematic policy tightening by monetary authorities to sterilize windfall-induced domestic liquidity. Conversely, in net oil-importing nations, changes in oil prices show a negative long-run relationship with the policy rate, which reverses to a positive impact in the short run to combat imported cost-push inflation. The study concludes that global energy shocks heavily dictate Nigeria's internal monetary transmission paths and exchange rate dynamics. Consequently, it is recommended that the Central Bank of Nigeria (CBN) explicitly integrate international crude oil partial sums into its macroeconomic forecasting models and optimize liquidity sterilization mechanisms alongside fiscal stabilization buffers to buffer the domestic economy against exogenous energy market volatility.