Causal Relationship among Domestic Oil Price, Exchange Rate and Inflation in Nigeria: An Application of VECM Granger Causality Procedure
Kabiru Saidu Musa *
Department of Economics, Faculty of Social and Management Sciences, Bauchi State University Gadau, Yuli Campus, Bauchi, Nigeria.
Rabiu Maijama’a
Nigerian National Petroleum Corporation, NNPC Towers, Central Business District, Garki, Abuja, Nigeria.
*Author to whom correspondence should be addressed.
Abstract
The purpose of this paper is to investigates the causal association among domestic oil price, exchange rate and inflation rate for the sample period of 1985 to 2019 in Nigeria. Johansen test for cointegration and technique of vector error correction model Granger causality were utilized. The outcome from Johansen cointegration test revealed that there is strong cointegration between the variables and vector error correction model Granger causality outcome indicates that one-way causalities exist running from exchange rate to inflation rate and exchange rate to domestic oil price with no long-run causalities in inflation rate and domestic oil price equations. Again, there are unidirectional causalities running from domestic oil price to exchange rate and inflation to exchange rates together with long-run causality in the exchange rate equation only. According to the current investigation Nigeria could be more prosperous, if the country’s monetary authorities would consider policy thrust that aim at targeting both inflation and exchange rates, alongside maintaining a stable petroleum pump price by the Petroleum Products Pricing Regulation Agency (PPPRA) in order to aid in curtailing the increasing rate of inflation in the country.
Keywords: Domestic oil price, exchange rate, inflation rate, VECM technique, cointegration test, variance decomposition, impulse response functions.
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