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International Journal of Research and Innovation in Social Science (IJRISS) |Volume VI, Issue XII, December 2022|ISSN 2454-6186

Modelling the impact of crude oil price on Nigerian exchange rate during COVID-19

 Leelee N. Deekor, Deebii Nwiado, Onyinyechi Nweke
Department of Economics, Ignatius Ajuru University of Education Port Harcourt, Nigeria

IJRISS Call for paper

Abstract: This study examines whether the dynamics of the impact of oil prices on currency rates during a crisis are comparable throughout the many COVID-19 pandemic waves using the example of the Nigerian economy. The ARDL model was deemed the most appropriate to model the relationship between exchange rates and oil prices in the setting of this study, which is consistent with the results of our unit root testing. The study demonstrates empirically that, in the setting of exporting economies, the effect of oil prices on exchange rates is as theoretically predicted. It also shows that the average depreciation patterns of the Nigerian naira in relation to the US dollar tend to get worse when the COVID-19 pandemic outbreaks occur.

Keywords: Exchange rates; Oil prices; COVID-19; Nigeria; ARDL

JEL Classification: F31; O55; Q41;

I. INTRODUCTION

Since the emerging of the theoretical paper pioneered by Krugman (1983) and Golub (1983), the debate on the exchange rate and oil prices relationship usually rests on the fact that oil price is quoted in US dollar (USD) and therefore, fluctuations in oil price may affect the exchange rate behaviour of trading nations through the USD (see Salisu & Mobolaji, 2013). Theoretically, the impact of oil price shocks on economies that export oil should be different from that on those that receive oil. According to Abed et al. (2016), an increase in oil prices results in a wealth shift from oil-importing countries to oil-exporting countries. As a result, while rise in foreign exchange earnings and the accumulation of foreign exchange reserves are anticipated to result in an appreciation of the exchange rate of a country that exports oil, it is anticipated that the currency rates of countries that import oil will decline (see Albulescu & Ajmi, 2021, for a survey of recent literature). However, it not clear whether these theoretical assumptions on the exchange rate –oil prices nexus can be generalized when the economic is in crisis compared to period of tranquility. To address this important concern, the contributions of this study to literature on exchange rate and oil price relationship are in twofold.
First, the dynamics of the impact of oil prices on exchange rates in tumultuous periods have primarily been examined in the context of the 2007–2008 global financial crisis, despite the mixed findings and inconclusive results that characterise the majority of existing studies (see, for example, Jin & An, 2016; Boamah et al., 2017; Jiang et al., 2017; Nikkinen et al., 2020; Sheikh et al., 2020; Hung, 2021).