Open AccessA Non-Linear Analysis of the Oil Price-Exchange Rate Nexus in Nigeria
Author(s) -
O Olagbaju Ifeolu,
O Akinbobola Temidayo
Publication year - 2016
Publication title -
journal of economics and behavioral studies
Language(s) - English
Resource type - Journals
ISSN - 2220-6140
DOI - 10.22610/jebs.v8i4(j).1365
Subject(s) - exchange rate , depreciation (economics) , nexus (standard) , economics , oil price , econometrics , currency , monetary economics , order (exchange) , microeconomics , profit (economics) , capital formation , finance , financial capital , computer science , embedded system
This paper studies the effect of oil price shocks on the Nigerian exchange rate on the basis of monthly data over the period January, 2008 to October, 2015. In order to explore the effects of oil prices on the competitiveness of the Nigerian currency, which had hitherto attracted little attention in literature, the paper adopts the real effective exchange rate measure within a five-variable VAR model, analysed using both linear and non-linear approaches. We find evidence of a non-linear impact of oil prices on real effective exchange rate. Specifically, decreases in oil price are found to have an appreciating impact on real effective exchange rate, implying a loss of competitiveness of the Naira, while increases in oil price are found to be irrelevant for movements in the real effective exchange rate. Our study also suggests a link between Naira depreciation and the real effective exchange rate appreciation through a pass-through effect on rising domestic prices.