TESTING ASYMMETRIC EFFECT OF OIL PRICE ON EXCHANGE RATE IN NIGERIA: NEW EVIDENCE FROM NONLINEAR ARDL APPROACH

Abstract

This study examined the existence of asymmetry relationship between oil price and exchange rate in
Nigeria during the period 2008:1-2017:12. The study applied unit root test to ensure that none of
the variables is integrated of order I (2) and nonlinear autoregressive distributed lags (NARDL)
model, respectively. The results revealed that all the variables are stationary at their first difference
and that there exist cointegrating relationship between oil price increase, oil price reduction and
exchange rate in the study period. Similarly, the findings from the study indicate that oil price
reduction has a significant negative impact on the exchange rate. However, the increase in oil price
has a negative but not significant effect on exchange rate in the long run, thereby confirming the
existence of asymmetric relationship between oil price increase and decrease on the exchange rate.
The estimated model on the basis of diagnostic tests is found to be adequate and stable from the
CUSUM stability test. The paper therefore recommends that the monetary authorities should adopt
other policy measures to guard against the negative effect of oil price decrease on the values of
Nigeria’s currency (Naira)