MACROECONOMIC TRANSMISSION MECHANISMS OF CRUDE OIL PRICE SHOCKS IN NIGERIA: A SEEMINGLY UNRELATED REGRESSION ANALYSIS

This study investigates the macroeconomic transmission mechanisms of crude oil price (COP) shocks in Nigeria from 1990 to 2025. It maps how these shocks propagate through four structural channels: growth, price, foreign exchange, and investment. To address the limitations of separate single-equation models, we use Zellner’s Seemingly Unrelated Regression (SUR) framework. This model captures the contemporaneous correlation across five dependent variables: Real Gross Domestic Product (RGDP), Inflation (INF), Exchange Rate (EXR), Interest Rate (INT), and Unemployment (UNE). System diagnostics, supported by the Breusch-Pagan LM test, confirm the efficiency gains of using the SUR approach over Ordinary Least Squares (OLS). The empirical results show that a 10% surge in global crude prices expands real output (RGDP) by 1.24%, confirming a positive growth channel. However, this windfall also triggers cost-push inflationary pressures, with a significant positive impact on headline inflation (INF). The foreign exchange channel shows that positive oil shocks strengthen the Naira (-0.485), whereas price drops lead to currency depreciation. In the investment and labor channels, positive oil shocks reduce policy interest rates (-1.850) and lower unemployment (-2.480). Conversely, negative shocks lead to monetary tightening and higher unemployment. These findings show that while oil windfalls support short-term growth, they also feed structural inflation and cyclical unemployment. We recommend setting up structural counter-cyclical fiscal buffers, fully deregulating domestic refining capacity, and targeting monetary policy to reduce oil-driven inflation.