Oil Prices and the Real Exchange Rate in Nigeria

Abstract

This paper has investigated the relationship between the real oil prices and the Real Exchange Rate. Using time series data covering the period between 1980 and 2010, the result of the Johansen cointegration test suggests a long run equilibrium relationship between the real oil prices and the Real Exchange Rate. This relationship was supported by the Granger Causality test which validated the causal relationship from the real oil prices to the Real Exchange Rate. The result from the Generalized Autoregressive Conditional Heteroskedasticity test suggests persistence of the volatility between the real oil prices and the Real Effective Exchange Rate. The implication of this is that government policies in tackling the impact of fluctuations in real oil prices are important source of stabilizing the movements in the Real Effective Exchange Rate. The Nigerian government should consider this important relationship when formulating and implementing economic policies.