Heterogeneous Impact of Oil Price Volatility on Exchange rate in African Countries: Evidence from Quantile Regression Approach

Abstract

The volatility of oil prices and the exchange rate are closely linked and multifaceted. However, this paper utilizes a quantile regression model to explain the heterogeneous changes in oil price and their impact on the exchange ratein the selected countries in Africa namely Nigeria, Gabon, and Algeria between 1995:Q1 to Q4:2018.This technique offers us the ability to verify the predictors of exchange rate movements throughout conditional probability distribution, with a special emphasis on the importance of depreciation as well as an appreciation of the domestic currencies.Our results confirm the distributional variability of the relationship between oil price fluctuations and the exchange rate. For OLS, the estimated coefficient of oil price volatility is insignificant and negative at a 5% significance level. The QR results depict a significantly positive nexus between volatilities of oil price and exchange rate at the 10% level of significance which are insignificantly different from the OLS results. The QR results reveal that appreciation and depreciation in oil prices impact exchange rate movement positively and negatively respectively. Furthermore, the QR estimated coefficient of oil price volatility provides a lower (0.10) and upper (0.90) quantiles, which substantially differentiable from zero, indicating that considerable depreciation and appreciation of $US appears to change the exchange rate response to oil price volatility, which could provide useful insights to investors and policymakers.