Oil Price Shocks, Fiscal Policy Response, and Macroeconomic Volatility in Nigeria

Nigeria's near-total dependence on oil revenues for fiscal funding creates a structural vulnerability that transmits oil price shocks into the domestic economy through the fiscal channel, amplifying macroeconomic volatility and complicating economic management. This study investigates how oil price shocks transmit through fiscal policy responses to generate macroeconomic volatility in Nigeria between 2005 and 2023. Secondary time-series data are sourced from the Central Bank of Nigeria Statistical Bulletin, the Debt Management Office, and the Budget Office of the Federation. The study employs a structural vector autoregression model with sign restrictions to identify oil price shocks and trace their impulse responses through government expenditure, tax revenue, budget deficit, and macroeconomic outcomes including inflation, exchange rate, and output growth. A fiscal reaction function is estimated to evaluate the degree to which government expenditure responds procyclically or countercyclically to oil price movements. The theoretical framework integrates the Dutch disease literature, the resource curse hypothesis, and the fiscal multiplier theory applied to oil-dependent economies. The study critically evaluates the performance of the Excess Crude Account and the Nigeria Sovereign Investment Authority Stabilisation Fund as fiscal buffers during the 2014 oil price collapse and the COVID-19 shock. Existing literature confirms persistent fiscal procyclicality in Nigeria, yet time-varying estimation using rolling window approaches has not been applied to capture structural shifts in the fiscal response function. This study addresses that methodological gap and produces findings relevant to the Federal Ministry of Finance, the Central Bank of Nigeria, and the International Monetary Fund's Nigeria Article IV consultation process. Keywords: oil price shocks, fiscal policy, macroeconomic volatility, Nigeria, structural VAR