In this study, an elaborate econometric analysis is offered which tests the sensitivity of a number of key macroeconomic indicators to oil revenue shocks, using the Impulse Response Functions (IRFs) and Variance Decomposition (VDC) techniques within a Vector Autoregressive (VAR) framework. The sensitivity analysis offers a novel contribution to the academic and policy literature on the macroeconomic responses to oil windfalls in Nigeria by testing for an ‘institutional quality’ variable. The inclusion of this variable is in recognition of the important role played by the domestic institutional context in shaping the policy responses adopted by successive Nigerian governments to oil windfalls over time. The general view that fluctuations in oil revenues have resulted in inflation is supported by this sensitivity analysis, as well as lower output growth and real exchange rate appreciation in Nigeria. The mismanagement of oil windfalls in Nigeria is not inevitable, and by adopting the right policies, and building strong institutions, Nigeria’s resource wealth can be used to lift its people out of poverty.
