THE NEXUS BETWEEN OIL PRICES AND EXCHANGE RATE: EVIDENCE FROM NIGERIA

Abstract

This study investigated the relationship between oil price changes and exchange rates in Nigeria from 1982 to 2023. The study also analyzed the direction of causality between oil price and exchange rates. To achieve these objectives, a Vector Autoregression model was employed and granger causality test was carried out. Results showed that oil price fluctuations had significant short and long run effects on exchange rates. In the long run, a 1% increase in oil price resulted in a 0.02875% change in the exchange rate. Interestingly, Granger causality tests revealed a unidirectional relationship from exchange rates to oil prices. The study concludes by recommending that the Nigerian government should properly manage its foreign exchange reserves and promote diversification of the economy into non-oil sectors to mitigate vulnerabilities associated with oil price changes.