Exchange rate movements and oil price expectation shocks in selected African countries: Evidence from a recursive methodology

Eddery Lam and Andrew Ojede

Energy Economics, 2025, vol. 148, issue C

Abstract: Many studies investigating the exchange rate-oil price nexus do not impose realistic gains on time-varying parameters, which more accurately depict how market participants react to shocks on exchange rates, especially those emanating from large movements in oil prices. The advantage of estimating time-varying parameters over the conventional ordinary least squares (OLS) estimator is that imposing realistic gains on time-varying parameters truly captures the behavior of foreign exchange market participants following an oil-price expectation shock. The main objective of this paper is to investigate how oil price expectation shocks affect exchange rate movements in selected African countries, which include a mix of net oil-exporting and net oil-importing countries. We deploy a recursive methodology to estimate time-varying parameters from an exchange rate–oil price regression. Since OLS weighs all observations equally and assigns an average parameter estimate, we find that time-varying parameter estimates tend to be larger and more accurately represent the behavior of market participants, especially profit-maximizing speculators. Moreover, the evolution of our time-varying parameter estimates mimics the exchange rate data generation process. Our results provide new insights into how exchange rates behave following an oil-price expectation shock at different quarterly time horizons and have important implications for monetary policy.

Keywords: Foreign exchange rate; Oil price; Recursive methodology; Time-Varying parameter; Africa (search for similar items in EconPapers)
JEL-codes: E52 F31 Q41 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:148:y:2025:i:c:s0140988325004803

DOI: 10.1016/j.eneco.2025.108653

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