Domestic fuel price and the Nigerian macroeconomy

Abstract

This study examined empirically a one–to–one nexus between domestic fuel price and various macroeconomic variables in Nigeria for the period spanning 1986 to 2011. The study adopted both a vector auto–regressive (VAR) and a vector error correction (VEC) models for appropriate analysis. For pairs of variables that are integrated of the same order but not co–integrated, the VAR model revealed that a unidirectional causation exist from domestic fuel price to short term interest rate while for the pair of variables that are integrated of the same order and are co–integrated the VEC model revealed the existence of causality from domestic fuel price to inflation rate in the long run and in the short run. The study recommended that serious caution should be taking by the government on domestic fuel price increase especially in an attempt to remove fuel subsidy and deregulate the downstream sector of the oil industry.