Oil Price Fluctuation and Exchange Rate Movement in Nigeria: 1980-2016

Abstract

This study is carried out to empirically examine oil price shocks and exchange rate movement in Nigeria. Three variables are used in this study which are exchange rate (EXR), oil price (OP) and oil export (OE). The variables were subjected to unit root test and they were all stationary at first difference I(1). Since the Variables were not all stationary at level but at the same order of I(1) the Johansen cointegration test was used to test for cointegration among the variables. Using the Johansen test, the variables were found to be cointegrated at 5% level of significance. Vector Auto regressive Model was used to determine the short-run relationship between the variables and the forth lag was selected based on the lag selection criterion. A Forcast Error Variance Decomposition (FEVD) was obtained using the cholesky decomposition of the VAR residual. The result obtained showed the proportion of the variations in exchange rate , oil price and oil export attributed to their respective lag values. Causality test indicated that there is bi causality between exchange rate and oil price. This means that oil price Granger cause exchange rate and exchange rate Granger cause oil price. Based on the findings the recommendations made include; that the government should diversify the economy to reduce over-reliance on oil revenue. Diversification of the economy will reduce the vulnerability of the domestic economy towards adverse oil price shocks.