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

Ikechukwu Kelikume ()
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Ikechukwu Kelikume: Pan-Atlantic University, Nigeria

Journal of Developing Areas, 2017, vol. 51, issue 4, 277-283

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.

Keywords: Oil Price Shocks; Inflation; Exchange Rates Pass-through; VECM (search for similar items in EconPapers)
JEL-codes: E32 F31 F41 O53 Q43 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (4)

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