OIL PRICE AND EXCHANGE RATE NEXUS IN NIGERIA: EVIDENCE FROM WAVELET ANALYSIS

Abstract

Crude oil is the source of essential petroleum products for productive economic activities. Primarily, Nigeria exports crude oil and imports petroleum products, and this has a link with the unfavourable exchange rate of the Nigerian currency vis-à-vis the US dollar over the years. Based on the proposition that there is no significant relationship between oil price and exchange, the paper examines the oil price-exchange rate nexus in Nigeria, with monthly data from 1980M1 to 2020M12 analysed within the framework of wavelet analysis. The results show evidence of a mixed relationship between oil prices and exchange rates during the period under study. The results also show evidence of the lead-lag effect of oil prices on exchange rates in the long run but not in the short and medium terms. Thus, oil price has a time varying effect on the exchange rate only in the long run. Furthermore, there is evidence of unidirectional causality from oil price to exchange rate in the short and medium run but bidirectional causality in the long run. Hence, oil price is a key determinant of exchange rate in the short and medium terms but not in the long term. Consequently, this study emphasizes the need for purposeful economic diversification in order to attain and sustain a stable exchange rate in Nigeria.