Oil Price and Exchange Rate Volatility in Nigeria

Journal of Economics and Finance (IOSR), Volume 5, Issue 4. (Sep.-Oct. 2014), PP 01-09

9 Pages Posted: 3 Oct 2014

See all articles by Oluwatomisin Ogundipe

Oluwatomisin Ogundipe

Covenant University

Paul Ojeaga

University of Bergamo

Adeyemi Ogundipe

Covenant University

Date Written: July 1, 2012

Abstract

Oil as the mainstay of the Nigerian economy, accounts for over 95 percent of its foreign earnings and about 83 percent of its budgetary allocation, to this end, changes in oil prices has implications for the Nigerian economy and, in particular, exchange rate movements. The latter is mostly important due to the double dilemma of being an oil exporting and oil-importing country, a situation that emerged in the last decade. The study examined the effects of oil price, external reserves and interest rate on exchange rate volatility in Nigeria using annual data covering the period 1970 to 2011. The long run relationship among the variables was determined using the Johansen Co-integration technique while the vector correction mechanism was used to examine the speed of adjustment of the variables from the short run dynamics to the long run equilibrium. It was observed that a proportionate change in oil price leads to a more than proportionate change in exchange rate volatility in Nigeria; which implies that exchange rate is susceptible to changes in oil price. The study therefore recommend that the Nigeria government should diversify from the oil sector to other sectors of the economy hereby dwindling the impact of crude oil as the mainstay of the economy and overcome the effect of incessant changes in crude oil prices which often culminate into macroeconomic instability.

Keywords: Oil Price, Exchange rate volatility, Johansen Co-integration, Vector Error Correction Model

JEL Classification: O24 C22 F41

Suggested Citation

Ogundipe, Oluwatomisin and Ojeaga, Paul and Ogundipe, Adeyemi, Oil Price and Exchange Rate Volatility in Nigeria (July 1, 2012). Journal of Economics and Finance (IOSR), Volume 5, Issue 4. (Sep.-Oct. 2014), PP 01-09, Available at SSRN: https://ssrn.com/abstract=2504025

Oluwatomisin Ogundipe

Covenant University

P.M.B. 1023
Km 10 Idiroko road
Ota, Ogun State 234
Nigeria

Paul Ojeaga

University of Bergamo ( email )

Via Salvecchio, 19
Bergamo, 24129
Italy

Adeyemi Ogundipe (Contact Author)

Covenant University ( email )

Canaanland
Km 10 Idiroko road
Ota, 24001
Nigeria
+2348161927372 (Phone)

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