Oil Price and Exchange Rate Nexus: A Vector Error Correction Approach on Nigeria

Hillary Chijindu Ezeaku, Nwanneka Judith Modebe, Grace Chinyere Eje, Anthony E. Ageme

Abstract


The goal of this study is to examine the linkages between oil price shocks and exchange rate volatility in Nigeria using monthly data from January 1996 to December 2015. The Johansen cointegration test confirms that a long-run relationship exists between oil price and real exchange rate. The VEC estimations show that oil price is negatively related to exchange rate in the short-run. The results indicate that when oil price rises by one unit, exchange rate appreciates by 6.5%. We also estimated a long-run causation which reveals that when oil price rises by 1 percent, exchange rate depreciates by 58 percent. Short-run exchange rate gains from oil price increases were more than proportionately lost in the long-run. Furthermore, one percent change in CPI (inflation) results to 28.5 percent depreciation in exchange rate. The VEC Granger causality test result provided evidence of a unidirectional causality running from oil price to exchange rate.

Keywords: Oil Price, Exchange Rate, Vector Error Correction Model

JEL Classifications: C2, F4, Q43


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