Oil Price Shocks and Exchange Rates in Nigeria: A Forecasting Model

Abstract

Several empirical studies have revealed equivocal behavior in exchange rates as a result of unpredictable oil prices. This study forecasts the exchange rates of the Nigerian surrence, Naira using both dynamic and static forecasting procedures. The stationarity test which revealed that all variables are stationary at both level and first difference motivated the use of autorgressive distributed lag (ARDL) model to forecast exchange rates in this study. The ARDL reveals evidence of a short-run relationship between exchange rates and the explanatory variables that forecast exchange rates. The study compared the actual exchange rates with the forecasted exchange rates to form an analysis that measures the forecasting accuracy of the various models. The results show that all the estimates in the ARDL model behave well in forecasting exchange rates for Nigeria. Thus, the models performed well, and it is concluded that they are suitable to forecast exchange rates in the country. Findings from the study serve as a guide to policy makers. It could also assist policy makers to obtain early signals of future crises, hence, allowing them to make accurate exchange rates forecasts. As a result of globalization, the findings of this study are important to both importers and exporters since exchange rates instability has different effects on their decision making on matters relating to international transactions.