A Non-Linear Analysis of the Oil Price-Exchange Rate Nexus in Nigeria

Akinbobola Temidayo O,Olagbaju Ifeolu O

doi:10.22610/jebs.v8i4(j).1365

Abstract

This paper studies the effect of oil price shocks on the Nigerian exchange rate on the basis of monthly data over the period January, 2008 to October, 2015. In order to explore the effects of oil prices on the competitiveness of the Nigerian currency, which had hitherto attracted little attention in literature, the paper adopts the real effective exchange rate measure within a five-variable VAR model, analysed using both linear and non-linear approaches. We find evidence of a non-linear impact of oil prices on real effective exchange rate. Specifically, decreases in oil price are found to have an appreciating impact on real effective exchange rate, implying a loss of competitiveness of the Naira, while increases in oil price are found to be irrelevant for movements in the real effective exchange rate. Our study also suggests a link between Naira depreciation and the real effective exchange rate appreciation through a pass-through effect on rising domestic prices.

Highlights

IntroductionThe variability in prices of oil is expected to have a significant impact on the country’s exchange rate, given the (managed) float exchange rate system adopted in the country
Crude oil exports account for a large proportion of the Nigerian government revenue
In subsection 4.3, we analyse the effects of oil price shocks on real effective exchange rate (REER) after comparing the performance of the different specifications considered, emphasizing the results of the most preferred model based on different criteria

Summary

Introduction

The variability in prices of oil is expected to have a significant impact on the country’s exchange rate, given the (managed) float exchange rate system adopted in the country. Countries which are largely dependent on imports for consumption of goods and services are prone to exchange rate transmission effects on local prices (An and Wang, 2011; Aliyu et al, 2009).. Despite the status of Nigeria as a netexporter of crude oil, the country’s heavy dependence on imports of refined petroleum to meet her energy needs, coupled with the inflationary effect of the scarcity experienced in the domestic energy markets, could reverse the trends observed in the nominal depreciation of the exchange rate as evidenced by the appreciation of the real effective exchange rate (REER) Countries which are largely dependent on imports for consumption of goods and services are prone to exchange rate transmission effects on local prices (An and Wang, 2011; Aliyu et al, 2009). despite the status of Nigeria as a netexporter of crude oil, the country’s heavy dependence on imports of refined petroleum to meet her energy needs, coupled with the inflationary effect of the scarcity experienced in the domestic energy markets, could reverse the trends observed in the nominal depreciation of the exchange rate as evidenced by the appreciation of the real effective exchange rate (REER)

Results

Discussion

Conclusion