Oil Price Shocks and Domestic Investment in Nigeria: Evidence From a Vector Error Correction Model

This study examined the effect of oil price shocks on domestic investment in Nigeria, with particular emphasis on the roles of exchange rate and interest rate in the transmission of oil price shocks. The study adopted a quantitative ex-post facto research design and utilised annual time-series data covering 1991-2024. The data were analysed using descriptive statistics, the Augmented Dickey-Fuller unit root test, and the Vector Error Correction Model (VECM) to examine both the short-run dynamics and long-run equilibrium relationships among the variables. The findings revealed the existence of a long-run equilibrium relationship among oil prices, domestic investment, exchange rate, and interest rate. The results further showed that exchange-rate movements exert an important influence on oil-price dynamics in the short run, while interest-rate effects were relatively limited. Variance decomposition indicated that oil prices were predominantly explained by their own shocks, although the contribution of exchange-rate and interest-rate shocks increased over time. The study concludes that oil-price volatility remains an important source of macroeconomic uncertainty with implications for domestic investment in Nigeria. It recommends stronger macroeconomic stabilisation, prudent management of oil revenues, economic diversification, and investment-supporting monetary and fiscal policies to reduce the vulnerability of domestic investment to oil-price fluctuations.