Relationship between volatility in domestic oil prices, international oil prices, and exchange rates: Co-integration and granger causality tests
Keywords:
Exchange rate, Domestic oil price, ARDL, Granger causality, Nigeria.Abstract
This study examines the dynamic relationship between exchange rate fluctuations, global oil prices, monetary policy rates, and domestic oil price shocks in Nigeria between January 2012 and January 2025. The Autoregressive Distributed Lag (ARDL) model and Granger causality tests revealed a long-run co-integrating relationship between exchange rate fluctuations, global oil prices, monetary policy rates, and domestic oil price shocks (EXCR, OILP USD, MPR, and DOP). It also reveals a significant negative relationship in the long run between the exchange rate and the domestic oil price, which is insignificant in the short term. It also demonstrates that MPR has a significant positive effect on DOP in the long run but a negligible positive effect in the short run, and global oil price has an insignificant negative effect on domestic oil price in both the short and long run. Granger tests show unidirectional causality from DOP to EXCR, bidirectional feedback between EXCR and MPR, and no causality between OIL USD and DOP. These findings suggest that domestic macro-financial conditions and policy stance dominate long-term DOP movements, with global oil shocks having a short lag effect. To reduce volatility and welfare costs, policy should prioritise Forex market depth, coordinated monetary and fiscal actions, and transparent price smoothing rules.
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