EFFECT OF GLOBAL CRUDE OIL PRICE ON EXCHANGE RATE AND INFLATION RATE IN NIGERIA

Abstract

The aim of this study is to assess the effect of global oil price volatility on exchange rate and the inflation rate on Nigerian economic activities. The study also attempted to explained how naira will gain value as a result of increase in price of global crude oil in the oil market environment and also to highlight how the oil shocks will affect the exchange rate and as well as inflation rate in the Nigerian economy. This study developed a structural VAR model, using quarterly data spanning 2002Q1-2020Q2. The study hypothesized positive relationship between inflation rates and exchange rate with the change in prices of global oil market price downward or upward. The result indicated that: first, positive oil price shocks led to accretion of reserves and the naira appreciation against the US dollar, which come along with the wealth effect channel of oil price transmission techniques for oil-exporting countries; second, oil price shocks resulted in inflationary pressures and decrease in output growth; third, response of
monetary policy to oil price shocks was found to be generally restrictive; lastly, treasury-bill rate was found to be the optimal monetary policy tool in stabilizing exchange rate and the macroeconomic, amidst oil price shocks in the country.