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Do exchange rate and oil price shocks have asymmetric effect on inflation? some evidence from Nigeria

Author

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  • Ikechukwu Kelikume

    (Pan-Atlantic University, Nigeria)

Abstract

The effects of exchange rate and oil price on inflation have been fundamental issues in the macroeconomic literature. As a result, a number of studies have been devoted to examining the effects of exchange rate and oil price on inflation using various econometric approaches to measure the effects. However, most of the empirical studies employed restrictive models. This study, therefore, investigates the asymmetric effects of exchange rate and oil price shocks on inflation in Nigeria using monthly data obtained from the Central Bank of Nigeria (CBN) Statistical Bulletin for the period 2006M1-2016M6. The study employs the impulse response functions (IRFs) to determine the reaction of inflation to shocks from exchange rate and oil price. The IRFs are estimated from the vector autoregressive error correction (VECM) model. The results suggest that the immediate effect of a shock to the exchange rate in 12 months is about 50% increase in the price level. While the effect of an exchange rate depreciation shock is about 41% increase in the price level, the effect of an exchange rate appreciation is about 14% decrease in the price level. Similarly, the immediate effect of a shock to the oil price in 12 months is about 52% increase in the price level. While the effect of an increase in oil price in 12 months is about 43% increase in the price level, the effect of a decrease in oil price is surprisingly about 29% increase in the price level. Moreover, there is an evidence of significant effects of exchange rate and oil price shocks on inflation in the long run. The policy implication of this study, for an oil exporter such as Nigeria, is that monetary policymakers will have to keep the inflation rate at the comfort zone and stabilize the Nigerian currency. From a structural policy perspective, the falling crude oil price has certainly strained Nigeria. The country should, therefore, reshape its policy to redouble efforts to diversify its trade activities from oil.

Suggested Citation

  • Ikechukwu Kelikume, 2017. "Do exchange rate and oil price shocks have asymmetric effect on inflation? some evidence from Nigeria," Journal of Developing Areas, Tennessee State University, College of Business, vol. 51(4), pages 277-283, October-D.
    • Handle: RePEc:jda:journl:vol.51:year:2017:issue4:pp:277-283
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    Cited by:

    1. Bello Abdullahi MUHAMMAD & Muhammad Shehu SHUAIBU & Mohammad Junaid ALAM & Lawan Nasiru SALISU, 2023. "The Asymmetric Impact of Oil Price Volatility on Nigeria's Inflation," Economics and Applied Informatics, "Dunarea de Jos" University of Galati, Faculty of Economics and Business Administration, issue 3, pages 5-16.
    2. Moses Tule & Afees A. Salisu & Charles Chimeke, 2018. "You are what you eat: The role of oil price in Nigeria inflation forecast," Working Papers 040, Centre for Econometric and Allied Research, University of Ibadan.
    3. Moses Tule & Afees Salisu & Charles Chiemeke, 2020. "Improving Nigeria’s Inflation Forecast with Oil Price: The Role of Estimators," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 18(1), pages 191-229, March.
    4. Ahmed S. Alimi & Oladotun D. Olaniran & Timothy Ayuba, 2020. "An Assymetric Evaluation of Oil Price- Inflation Nexus: Evidence from Nigeria," Energy Economics Letters, Asian Economic and Social Society, vol. 7(1), pages 1-11, June.

    More about this item

    Keywords

    Oil Price Shocks; Inflation; Exchange Rates Pass-through; VECM;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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