ABSTRACT

Nigeria is a mono-product economy, where the main export commodity is crude oil, changes in oil prices has implications for the Nigerian economy and, in particular, exchange rate movements. The study examined the effects of oil price, external reserves and oil revenue on exchange rate volatility in Nigeria using yearly data from the year 1980 to 2016. The theoretical background of this study is based on the balance of payments theory and the purchasing power parity theory of exchange rate. Relevant descriptive and econometric analysis was employed. The econometrics tests used include unit root test or test for stationarity, using the augmented dickey fuller test which is suitable for large sample, Co integration test was conducted to show if there is a long run relationship between variables. The study made use of multiple regression method; thus exchange rate [EXR] as the dependent variable, oil price in the international market [OPR], oil revenue[ORV] and external reserves [EXRES] and the independent variables. It was observed that a proportionate change in oil price leads to a more than proportionate change in exchange rate volatility in Nigeria. We therefore recommend that the Nigeria government should diversify from the Oil sector to other sectors of the economy so that Crude oil will no longer be the mainstay of the economy and frequent changes in crude oil price will not influence exchange rate volatility significantly in Nigeria.