International Oil Prices and Exchange Rate in Nigeria: A Causality Analysis

Abstract

This study examined the effect of oil price movements on USD-Naira exchange rate pair using 420 observations from monthly time series data for the period January 2008 to December 2014. An ordinary least squares (OLS) model and a vector autoregression (VAR) model were estimated for analyzing respectively, the impact of oil price movements on exchange rate and the nature of causal link between them. Empirical results show that oil prices on a relative basis significantly affect exchange rate compared to imports. Also, there is evidence of unidirectional Granger causality from oil prices to exchange rate and from oil prices to foreign reserves. Based on the findings, policy recommendations were made in favour of a change in the current structure of our international trade to reduce and gradually eliminate import dependence in order to enhance the ability of the monetary authorities to manage both exchange rate and foreign reserves.