Asymetric Pass-through Effects of Oil Price Shocks and Exchange Rates on Inflation in Nigeria: Evidence from a Nonlinear ARDL Model

  • Suleiman Sa’ad Petroleum Studies Department, Organization of the Petroleum Exporting Countries (OPEC) Helferstorferstrasse, Vienna, Austria
  • Ali Baba Usman Department of Economics, BABA-AHMED University, Kano Nigeria
  • Solomon Ochada Omaye Department of Economics, Nigerian Defence Academy, PMB, Kaduna-Nigeria
  • Hamisu Yau Department of Economics, Ahmadu Bello University, Zaria, Nigeria
Keywords: Non-linear Autoregressive Distributed Lag (NARDL), asymmetric pass-through, oil price shock, exchange rates, and inflation

Abstract

By utilizing the non-linear ARDL (NARDL) model developed by Shin, et al (2014), we examined the asymmetric effect of oil price and exchange rates pass-through on inflation in Nigeria over a period of 1970 to 2020. Result of asymmetric test revealed the existence of asymmetries among the variables of the study, suggesting that there is a nonlinear interaction among the variables used in the study. This validates the choice of non-linear ARDL model for the study. Result of the long-run estimates show that rising (Positive) oil price shocks have a greater impact on inflation than falling (negative) oil price shock. Furthermore, ot is evident form the result that depreciation of exchange rate has much and significant effect on inflation than the appreciation of exchange rate in Nigeria. However, rising interest rate increases inflation by 0.84 per cent while falling interest rate increases inflation by 0.85 per cent. This implies that the effect of negative interest rate on inflation is higher than its positive effect on inflation, though, by a smaller amount of about 0.01 per cent. Again, the short-run dynamic model revealed a high speed of convergence of more than 90% from the short run disequilibrium. During the study period, the oil price fluctuations showed a significant and incomplete pass-through to both exchange rates and inflation in Nigeria. Based on the findings, the study recommends policies that set oil prices and exchange rate within reasonable limits in order to chack inflation in Nigeria.

Downloads

Download data is not yet available.

References

1. Adam, P. R. (2018). The causal relationship between crude oil price, exchange rate and rice price. International Journal of Energy Economics and Policy, 8(1),, 90-94
2. Adejumo, O. a. (2006). Oil price shocks and macroeconomic activities in Nigeria. International Research Journal of Finance and Economics 3, , 28–34.
3. Adejumo, O. a. (2006). Oil price shocks and macroeconomic activities in Nigeria. International Research Journal of Finance and Economics 3,, 28–34.
4. Ahmad AH, H. R. (2013). Asymmetric adjustment between oil prices and exchange rates: empirical evidence from major oil producers and consumers. Journal of International Financial Markets, Institutions and Money, 306–317.
5. Ahmad, A. a. (2013). Asymmetric adjustment between oil prices andexchange rates: Empirical evidence from major oil producers and consumers. Journal of International Financial Markets, Institutions & Money, 306– 317.
6. al, S. D. (2012). Relationship between Real Oil Price and Real Exchange Rate: the case of Turkey . Procedia - Social and Behavioral Sciences 58 , 1293 – 1300.
7. al, W. A. (2020). On the intraday dynamics of oil price and exchange rate: What can we learn from China and India? . Energy Economics Volume 91, September.
8. Aliyu, S. (2009). Impact of oil price shock and exchange rate volatility on economic growth in Nigeria: An empirical investigation. Research Journal of Internatıonal Studıes, (11, 4-15.
9. Amano, R. v. (1998). Oil prices and the rise and fall of the US real exchange rate. Journal of International Money and Finance 17,, 299–316.
10. Atems, B. K. (2015). Do Exchange Rates Respond Asymmetrically to Shocks in the Crude Oil Market? Energy Economics Volume 49, May , 227-238.
11. Atems, B. K. (2015). Do Exchange mRates Respond Asymmetrically to Shocks in the Crude Oil Market? Energy Economics , 227-238.
12. Ayoub Yousefi and, T. S. (2004). The empirical role of the exchange rate on the crude-oil price formation. Energy Economics 26 , 783– 799.
13. Bachmeier, L. a. ( 2011, 43(6)). Why Don’t Oil Shocks Cause Inflation? Evidence from Disaggregate Inflation Data. Journal of Money, Credit and Banking,, pp. 1165-1183.
14. Bachmeier, L. a. (2011). Why Don’t Oil Shocks Cause Inflation?Evidence from Disaggregate Inflation Data. Journal of Money, Credit and Banking, 43(6), 1165-1183.
15. Beckmann, J. &. (2020). The relationship between oil prices and exchange rates: Revisiting theory and evidence. Energy Economics, Elsevier, vol. 88.
16. Benassy-Quere, A. M. (2007). China and the relationship between the oil price and the dollar. Energy Policy 35, 5795–5805.
17. Benassy-Quere, A. M. (2007). China and the relationship between the oil price and the dollar. Energy Policy 35, 5795–5805.
18. Bernanke, B. S. (1997). Systematic monetary policy and the effects of oil price shocks. Brookings Papers on Economic Activity, 1997 (1),, 91–157.
19. Blanchard, O. &. (2007). The macroeconomic effects of oil shocks: Why are the 2000s so different from the 1970s? . NBER Working Paper, No. w13368.
20. Blanchard, O. J. (2009). The Macroeconomic Effects of Oil ShocksWhy are the 2000s So Different from the 1970s?, in International Dimensions of Monetary Policy. In J. G. Gertler. University of Chicago Press.
21. Brown S, Y. M. (2002). Energy prices and aggregate economic activity: an interpretative survey. . Quaterly Review of Economics & Finance 42:193e208.
22. CecilioTamaritb, M. C. (2002). Oil prices and Spanish competitiveness: a cointegrated panel analysis. Journal of Policy Modeling,Vol. 24 No. 6, , 591–605.
23. Chen, S. (2009). Oil price pass-through into inflation. Energy Economics, 31 (1), 126–133.
24. Chen, S.-S. C.-C. (2007). Oil Prices and Real Exchange Rates. Energy Economics, 29(3):390-404.
25. Choi, S. F.-R. (2018). Oil Prices and Inflation Dynamics: Evidence from Advanced and Developing Economies. Journal of International Money and Finance, 71-96.
26. Danyan, W. L. (2020). Extreme risk spillovers between crude oil prices and the U.S. exchange rate: Evidence from oil-exporting and oil-importing countries. Energy 22(1).
27. Ewurum, N. C. (2017). Inflation Targeting and Economic Growth Nexus in Nigeria: : Implications for Monetary Policy. International Journal of Academic Research in Business and Social Sciences Vol7(1), 12-27.
28. Gagnon, J. E. (2004). Monetary policy and exchange rate pass-through. International Journal of Finance and Economics, 9 (4), , 315–338.
29. Gali, C. a. (n.d.). Sources of Real Exchange Rate Fluctuations: How Important are Nominal Shocks? NBER Working Paper No. 4658 , Issued in February 1.
30. Guo, H. a. (2007). The role of oil price shocks on China's real exchange rate . China Economic Review 18(4), 403-416 .
31. Guo, H. a. (2007). The role of oil price shocks on China's real exchange rate . China Economic Review 18(4):, 403-416 .
32. Guo, H. a. (2007). The role of oil price shocks on China's real exchange rate . China Economic Review 18(4), 403-416 .
33. Hamilton, J. (1983). Oil and the Macroeconomy since World War II. Journal of Political Economy, 91, 228-248.
34. Hausmann, R. a. (2002). An Alternative Interpretation of the Resource Curse: Theory and Policy Implications. NBER Working Paper 9424,Cambridge, Mass.
35. Hooker, M. A. (2002). Are oil shocks inflationary?: Asymmetric and nonlinear specifications versus changes in regime. . Journal of Money, Credit and Banking, 34 (2), , 540–561.
36. Hui Jum Zhang et al. (2016). Exchange rate and commodity prices: measuring causality at multiple horizons. Journal of Empirical Finance, 100-120.
37. Ibrahim Alley. (2018). Oil price and USD-Naira exchange rate crash: Can economic diversification save the Naira? . Energy Policy Volume 118, July , Pages 245-256.
38. Jin, G. (2008). The impact of oil price shock and exchange rate volatility on economic growth: A comparative analysis for Russia Japan and China. . Research Journal of Internatıonal Studıes, (8), 98-111.
39. Jin, G. (n.d.). The impact of oil price shock and exchange rate volatility on economic growth: A comparative analysis for Russia Japan and China. . Research Journal of Internatıonal Studıes, (8), 98-111.
40. Jones, D. a. (2003). Foreign Exchange Rate and Oil price Exposure in the Long Run. Global Management Research, working paper series 41.
41. Joseph Chukwudi Odionye, O. S. (2019). Oil Price Shocks and Inflation Dynamics in Nigeria: Sensitivity of Unit Root to Structural Breaks. . International Journal of Business and Economics Research. Vol. 8, No. 2, , 58-64.
42. Kilian, L. (2014). Oil price shocks: causes and consequences. Annual Review of Resource Economic:;6:133e54.
43. L.Wyzan, A. M. (2005). Explaining the real exchange rate in Kazakhstan, 1996–2003 is Kazakhstan vulnerable to the Dutch Disease? Economic Systems 29,, 242–25.
44. Lu Yanga, e. a. (2018). What determines the long-term correlation between oil prices and exchange rates? The North American Journal of Economics and Finance, 140-152.
45. Macdonald, R. (1998). What determines real exchange rates? The long and the short of it. Journal of International Financial Markets, Institutions and Money 8:, 117-153.
46. Macdonald, R. (1998). What determines real exchange rates? The long and the short of it. Journal of International Financial Markets, Institutions and Money, 117-153.
47. McGuirk, A. (1983). Oil price changes and real exchange rate movements among industrial countries. IMF Staff Papers 30, 843-883.
48. Medvedev, P. K. (2019). Monetary policy and the effect of the oil prices pass-through to inflation. Russian Journal of Economics 5 , 211–219.
49. Moshiri, S. (2915). Asymmetric effects of oil price shocks on economic growth of oil exporting countries: the role of institutions. OPEC Energy Review: 39(2):, 222e46.
50. Muthalib, A. A. (2018). The influence of fuel prices and unemployment rate towards the poverty level in Indonesia. . International Journal of Energy Economics and Policy, 8(3), , 37-42.
51. Norden, R. A. (1998). Oil Prices and the Rise and Fall of the U.S. Real Exchange Rate. Journal of International Money and Finance, 299-316.
52. Osuji, E. (2015). Oil Prices and Exchange Rate in Nigeria: A Causality Analysis. International Journal of Academic Research in Economics and Management Sciences, pp. Vol. 4, No. 3.
53. Paresh Kumar Narayan, S. N. (2008). Understanding the oil price-exchange rate nexus for the Fiji islands. . Energy Economics 30, 2686–26.
54. Paresh Kumar Narayan, S. N. (2008). Understanding the oil price-exchange rate nexus for the Fiji islands. Energy Economics 30 , 2686–2696.
55. Pinto, B. (1987). Nigeria During and After the Oil Boom: A Policy Comparison with Indonesia. THE WORLD BANK ECONOMIC REVIEW, VOL. 1, NO. 3.
56. Pourroy, A. L.-V. (2019). ,Inflation target and (a)symmetries in the oil price pass-through to inflation . Energy Economics 80, 860–875.
57. Prasertnukul, W. K. (2010). Exchange rates, price levels, and inflation targeting: Evidence from Asian countries. . Japan and the World Economy, 2010, vol. 22, issue 3, , 173-182.
58. QF, A. (2004). Oil prices and exchange rates: Norwegian experience. Economic Journal 7, 476–504.
59. Rautava, J. (2004). The role of oil prices and the real exchange rate in Russia's economy—a cointegration approach. , . Journal of comparative economics, pp. 32(2), 315-327.
60. S Sa'ad (2010), Energy consumption and economic growth: causality relationship for Nigeria OPEC Energy Review,Vol. 10, Issue 1,pages 15-24
61. Blackwell Publishing Ltd 2010
62. Sani, A. (2020). Crude Oil Price and Exchange Rate: An Analysis of the Asymmetric Effect and Volatility Using the Non Linear Autoregressive Distributed Lag and General Autoregressive Conditional Heterochedasticity in Mean Models. International Journal of Energy Economics and Policy, , 104-108.
63. Sannassee, R. L. (2012). Oil prices and exchange rates: the case of Mauritius . Journal of International Business and Economics Volume: 12 Issue: 3.
64. Sannassee, R. L. (2012). Oil prices and exchange rates: the case of Mauritius .. Journal of International Business and Economics, Volume: 12 Issue: 3.
65. Seyhun Doğan, M. U. (2012). Relationship between Real Oil Price and Real Exchange Rate. Procedia - Social and Behavioral Sciences 00.
66. Solaymani, A. S. (2020). Responses of monetary policies to oil price changes in Malaysia. Energy Volume 200, 1 June, 117553.
67. Wirjanto, Y. a. (2004). The Empirical Role of the Exchange Rate on the Crude-Oil Price Formation. . Energy Economics 26, , 783-799.
68. Wirjanto, Y. a. (2004). The Empirical Role of the Exchange Rate on the Crude-Oil Price Formation. . Energy Economics 26, , 783-799.
69. Wyzan, K. a. (2005). Explaining the real exchange rate in Kazakhstan, 1996–2003, is Kazakhstan vulnerable to the Dutch Disease? Economic Systems 29, , 242–25.
70. Zubair, A. O. (2013). Exchange Rate Pass-Through to Domestic Prices in Nigeria: An Empirical Investigation,. Central Bank of Nigeria Economic and Financial Review Volume 51/1 March.
Published
2023-01-17
How to Cite
Sa’ad, S., Usman, A. B., Omaye, S. O., & Yau, H. (2023). Asymetric Pass-through Effects of Oil Price Shocks and Exchange Rates on Inflation in Nigeria: Evidence from a Nonlinear ARDL Model. European Scientific Journal, ESJ, 1, 350. Retrieved from https://eujournal.org/index.php/esj/article/view/16341
Section
ESI Preprints