Threshold of currency devaluation and oil price movements that stimulates industrial production

Abstract

Even though oil prices are not subject to manipulations by individual countries, instability in the same generates shocks that other variables respond to, yet amid these shocks, more units of local currencies in developing countries are needed to acquire foreign inputs for production. Fluctuating oil prices consequently imply that high prices would increase the cost of production and ultimately reduce the purchasing power of industries. This study ascertains threshold effects of exchange rate devaluation and changes in oil prices on the industrial output of thirty developing countries using threshold and nonlinear autoregressive distributed lag (NARDL) regressions. Results revealed percentage rise above the devaluation threshold caused a fall in production by 4.36 percent. Oil prices within this devaluation region negatively affected output. Below and within the devaluation threshold of 0.692, the relationship patterns switch with oil price variability attracting positive and significant effects, while devaluation impacted industrial output positively with a substantial magnitude of 0.334. A higher devaluation was met with lower output in the industrial sector. In this higher region, increased oil prices weaken devaluation effects by 91.882. When a currency falls more than it is obtainable in the threshold (6.9 percent), oil prices cut output by a larger magnitude than it stimulated positively when the devaluation rate did not surpass the threshold value.