OIL REVENUE MANAGEMENT FOR INFLATION CONTROL IN NIGERIA: A VECTOR AUTOREGRESSIVE (VAR) ANALYSIS APPROACH

Nigeria has experienced fluctuations in oil revenue in recent years, this has reflected in a rise in inflation, exchange rate appreciation and consequently weak economic growth. This paper examined the impact of oil revenues on inflation in Nigeria from 1970 to 2015 using econometric techniques of vector autoregressive (VAR) model. The pre-estimation, tests (unit root and cointegration) informed the researcher?s decision to estimate a vector error correction mechanism. The estimated VECM model shows that inflation and gross national savings will react against the error with adjustable speed of 30.90%. Secondly, the coefficient of one-year lag of oil revenue appeared with the expected negative sign but not significant. A significant transmission mechanism from oil revenue to government spending and to inflation was also not observed from the result. The impulse response result shows that a unit positive standard deviation shock to oil revenue will lead to a positive response from inflation from the first year till the tenth year. Moreover, the controlling variables show a negative response from year one to the tenth year. The variance decomposition result shows that a shock in oil revenue will account for an average of 18.90% variation in inflation, moreover, a shock in government total expenditure and gross national savings will account for an average of 8.40% and 1.07% variation in inflation during a 10-year period respectively. This study concludes that oil revenue has a positive impact on inflation, whereas government expenditure and national savings would reduce inflation growth. This suggests that fiscal policy in the form of increase government expenditure and savings should be implemented to stabilize the economy and reduce inflation.