THE IMPACT OF MONEY SUPPLY AND CRUDE OIL

PRICE ON EXCHANGE RATE IN NIGERIA (1990-2022)

A PROJECT

SUBMITTED TO THE

DEPARTMENT OF ECONOMICS AND DEVELOPMENT STUDIES,

FACULTY OF SOCIAL SCIENCES, FEDERAL UNIVERSITY

DUTSIN-MA

IN PARTIAL FULFILLMENT FOR THE REQUIREMENTS FOR THE

AWARD OF BACHELOR OF SCIENCE (B.SC) DEGREE IN
ECONOMICS

BY

ABBAS AMINU ASHIR

SOC/2019/9235

OCTOBER, 2023

i
 DECLARATION

I AMNIU ASHIR ABBAS, hereby declare that this project is a product of my own research. It

has not been accepted anywhere for the purpose of awarding a higher degree. All references have

been acknowledged by a way of bibliography at the end of the project.

______________________
______________________
AMINU ASHIR ABBAS Date

SOC/2019/9235

ii
 CERTIFICATION

This project entitled “Impact of Money Supply and Crude Oil Prices on Exchange Rate in Nigeria”
by ABBAS AMINU ASHIR (SOC/2019/9235) been approved for its contribution to knowledge and met
the requirements for the award of the Bachelor of Science Degree (Economics) in the Department of
Economics & Development Studies of the Federal University, Dutsin-Ma.

______________________________ ____________________
Name of Supervisor Date
DR. SAIFULLAH SANI IBRAHIM

______________________________ ____________________
Name of the Head of Department Date
DR. SAIFULLAH SANI IBRAHIM

______________________________ ____________________
Name of the External Examiner Date
Prof. ALIYU RAFINDADI SANUSI

iii
 DEDICATION
This research work is dedicated to memory of my father Muhammad Ashir Abbas and mother

Hauwa Aminu Imam for their untiring love, advices and support during their life. Indeed, the

motivation imbedded in me has made me a hardworking and dedicative student which has

brought me this far. May Almighty Allah reward them.

iv
 ACKNOWLEDGEMENT
Foremost, sincere appreciation goes to Almighty Allah the most Merciful and most Gracious for

His mercies and protection over me and giving me the ability to put this work together.

I have incurred many intellectual debts while writing this project and received considerable

financial assistance from various individuals to make the whole gamut of this research feasible. No

acknowledgement can adequately express my gratitude for the help I have received in the process of

this research work.

My profound gratitude and appreciation go to my supervisor DR. SAIFULLAH SANI IBRAHIM,

who stood by me all through the course of writing this project and whose solid and constructive

civisms have greatly improve the quality of this project.

I owe a lot to my parents, Alhaji Muhammad Ashir Abbas, and Hajiya Hauwa Aminu Imam and my

brothers and sisters, Rabi’a Aminu, Abdallah Amimu, Aminu Anas musa Abubakar Ashir abbas

Bilkisu Ashir Abbas and others family member.

I wish to immensely thank Aisha Abubakar, Faruq Aminu imam, Abdussalam Harun, Muhammad

Aminu Imam Hadiza Aminu Imam, Saudat Aminu Imam and others, their various contributions

were highly appreciated.

My appreciation equally goes to my colleagues Ibrahim Usman Ibrahim, Gali Sani, Nasir

Muhammad, Mussadiq Yakubu Musa, Na’atu Hamza, Nafisat hamza, Balqeez Abdulsalam, Fatima

Mukhtar Ado, Auwal speaker, and others for their support.

Above all, I am most grateful to the Almighty Allah, for without Him, I would have not been able

to complete my programme.

Finally, I want to say in as much as I owe a debt of gratitude to all my fellow colleagues, I

nevertheless accept full responsibility for any error contained herein.

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 TABLE OF CONTENTS
COVER PAGE ________________________________________________________________i
DECLARATION______________________________________________________________ii
CERTIFICATION_____________________________________________________________iii
DEDICATION________________________________________________________________iv
ACKNOWLEDGEMENTS ______________________________________________________v
TABLE OF
CONTENTS________________________________________________________vi
LIST OF TABLES___________________________________________________________viii
ABSTRACT_________________________________________________________________ix
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study ____________________________________________________1
1.2 Statement of the problem____________________________________________________6
1.3 Research Question_________________________________________________________7
1.4 Research Objectives________________________________________________________8
1.5 Research Hypothesis________________________________________________________8
1.6 Significance of the Study____________________________________________________9
1.7 Scope and limitation of the Study____________________________________________10
1.8 Organization of the Study__________________________________________________10

CHAPTER TWO
LITERATURE REVIE_______________________________________________________12
2.1 Introduction______________________________________________________________12
2.2 Conceptual literature______________________________________________________12
2.2.1 Concept of money supply_________________________________________________12
2.2.2 Concept of crude oil______________________________________________________15
2.2.3 Concept of exchange rate_________________________________________________17
2.2.3.1 Factors affecting exchange rate___________________________________________18
2.3 Theoretical literature______________________________________________________20
2.3.1 Theories on money_______________________________________________________20
2.3.2 Theories on crude oil_____________________________________________________22

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2.3.3 Theories on exchange rate_________________________________________________23
2.4 Empirical literature review_________________________________________________27
2.4.1 Money supply and exchange rate___________________________________________27
2.4.2 Crude oil price and exchange rate__________________________________________29
2.5 Research gap_____________________________________________________________33
CHAPTER THREE
3.1 Introduction______________________________________________________________34
3.2 Methodology_____________________________________________________________34
3.4 Sources of data___________________________________________________________34
3.5 Model specification________________________________________________________35
3.5.1 Data evaluation techniques________________________________________________36
3.5.2 Descriptive statistics______________________________________________________36
3.5.3 Unit Root test___________________________________________________________36
3.5.4 Economic (a priori) test___________________________________________________37
3.6 Short-run Diagnostic and stability test________________________________________38
CHAPTER FOUR
4.1 Introduction______________________________________________________________40
4.2 Data presentation _________________________________________________________40
4.2.1 Descriptive statistics______________________________________________________40
4.3 Unit Root test_____________________________________________________________41
4.4 Post estimation test________________________________________________________45
4.5 Test of hypothesis_________________________________________________________49
4.6 Discussion of the result_____________________________________________________50
CHAPTER FIVE
5.1 Introduction______________________________________________________________53
5.2 Summary________________________________________________________________53
5.3 Conclusion_______________________________________________________________54
5.4 Recommendation__________________________________________________________55
REFERENCES______________________________________________________________58
APPENDIX_________________________________________________________________60
 LIST OF TABLES
Table 1: Descriptive statistic__________________________________________________40
Table 2: ADF Unit Root test___________________________________________________43
Table 3: ARDL Bound test for long-run relation__________________________________43
Table 4: Long run Co efficient estimate_________________________________________44
Table 5: short-run Coefficient estimate__________________________________________44
Table 6: Serial correlation test result____________________________________________45
Table7: Heteroskedasticity test result____________________________________________46
 ABSTRACT
This research study empirically evaluated the effect of money supply and crude oil prices on
exchange rate in Nigeria using annual time series data from 1986 to 2022. The study employed
the Augmented Dickey-Fuller unit root test, Autoregressive Distributed Lag (ARDL) Bounds
Test for cointegration and the Short-run Error Correction Model (ECM) to link the
disequilibrium in the short run to the long run. From the findings of the study, money supply
has a negative and significant impact on exchange rate while crude oil prices have a positive
and significant impact on exchange rate in Nigeria both in the long and short run respectively.
From the short-run Error Correction Model, 48.22% of the short run disequilibrium in the
model is corrected annually to bring the model to a long run equilibrium. The independent
variables used in the model had an explanatory power of 87.27% The study recommended
amongst others that the monetary authorities should embark on contractionary monetary
policy. This will cause declining in the level of broad money supply and monetary policy rate
and eventually lower exchange rate depreciation in the country.

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 CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

One of the critical factors that determines the stability or otherwise of external

balance of a country is the value of the country’s currency vis-à-vis or in relation to the

currencies of other countries – especially its trading partners. This value is usually

measured through exchange rate mechanism. Furthermore, a vital issue to those in charge

of making policies in a country and economists is the special role of money in the

economy, due to its stupendous importance as a change in its amount can have a

significant effect on the major macroeconomic indicators. Inflation, unemployment,

economic growth, exchange rates and vice versa (Yunana et al, 2014), The convergence

between money supply and various macroeconomic variables (especially exchange rate)

has been receiving increasing attention in the field of monetary and financial economics

in recent years as Economists differ on the relationship between money supply and

various economic variables (Owolabi and Adegbite, 2014).

Various assertion has been downplaying the position of money in an economy,

and have constrained the position of money to that of a means to economic development

without seeing it intrinsically as an end in itself which could react to volatility in

economic variables, while some agreed that variation in the quantity of money is the most

important determinant of economic factors such as exchange rate and that countries that
devote more time to studying the behaviour of aggregate money supply rarely experience

much variation in their economic activities (Zafarand Sabo, 2017).

The relationship between money supply and exchange rate has been receiving

increasing attention in the field of monetary economics in recent years. Economists differ

on the effect of money supply on exchange rate, while some agreed that variation in the

quantity of money in supply is the most important determinant of exchange rate, and that

countries that devote more time to studying the behavior aggregate money supply rarely

experience much variation in their economic activities (Auwal and Jamal,2017). Others

are skeptical about the role of money or gross national income. Financial markets start

growing as the economy approaches the intermediate stage of growth process and

develop once the economy become smatured (Kuttner 2011). This connotes that

economic growth stimulate increased financial developments. According to Dedolab and

Lippi (2019), there may not be possibility of rising exchange rate without an appropriate

level of money supply, credit, and appropriate financial conditions in general.

On the other hand, one of the objectives of establishing central bank is to maintain

external reserves to safeguard the international value of the legal tender currency.

However, this objective is increasingly becoming difficult to achieve in recent times by

the frequent changes in macroeconomic variables including exchange rate values of

currencies of crude oil exporting economies sometimes occasioned by fluctuations in

crude oil price. With the presumed influence of crude oil price fluctuations on domestic

2
currencies of exporting countries, researchers within and outside Nigeria has shifted

attention on the relationship between crude oil price on exchange rate (Henry, 2019).

Prior to 1986, the Nigerian government adopted fixed exchange rate policy,

wherein value of the naira was pegged against the British pounds sterling and soon after

changed to U.S Dollar from 1970 to 1985, exchange rate of the naira was below one naira

to a dollar while annual average crude oil price fluctuates. Crude oil prices and exchange

rates data available prior to 1986 has shown that exchange rate was relatively stable

compare to crude oil price. In 1970, the average annual crude oil price was1.21dollars per

barrel while the average annual official exchange rate of the naira relative to a dollar was

0.714 kobo. From1971 to 1973, international crude oil price increased slowly to1.7

dollars per barrel in 1971, 1.82 dollars in 1972 and 2.7dollars in 1973. However, the naira

value appreciates from0.714 kobo in 1970 to 0.713 kobo, 0.658 kobo and remained at

0.658 in 1971, 1972 and 1973 respectively. In 1974, the average annual crude oil price

rose to 11 dollars per barrel while the naira exchange rate value appreciates to 0.630

kobo. Similarly, price of crude oil fell to 10 dollars per barrel in1975 and increased to

11.6 dollars per barrel in 1976 while naira value further appreciate to 0.616 kobo in 1975

and depreciate slightly to 0.627 kobo in 1976.Since the turn of the new century, crude oil

prices have been rising and falling. In 2014, the price of bonny light crude oil (which is

Nigeria’s exported brand of crude oil) was as high as US$140 per barrel. In late 2016, it

dropped and this resulted in the recession of the Nigerian economy. In 2022, the price of

crude oil ended at around US$75 per barrel.

3
 For exchange rate, in 1986, the Nigerian government adopted World Bank/IMF

Structural Adjustment Programme (SAP). One of the Objectives was to achieve realistic

exchange rate policy through establishment of foreign exchange market (FEM) to

increase the cost of imports, reduce excess import spending and subsequently enhance

GDP growth. The abolition of the Bretton Wood system of pegged exchange ratein 1973

and subsequent adoption of SAP in 1986, floating exchange rate regime was sanctioned.

The naira was allowed to drift and its value in relation to a dollar determined by forces of

supply and demand of foreign exchange, though with little intervention from the

government.

According to Obi, Gobna and Abu (2010) some of the programmes adopted to

ensure a stable exchange rate for the naira are: Inter-bank Foreign Exchange Market

(IFEM),Second-Tier Foreign Exchange Market (SFEM), Dutch Auction System (DAS),

Autonomous Foreign Exchange Market (AFEM), Bureau De Change (BDC) among

others. It is important to note that failure and inability of each policy led to adoption of

another. In the past three decades, despite efforts by the monetary authority to achieve

stable exchange rate also avoiding misalignment and fluctuations in the value of naira, it

continued to depreciate as crude oil price fluctuate. The co-movement is shown by crude

oil price and foreign exchange rate data from 1986 to 2022.From 1986 to 1993 as crude

oil price changes, the Naira depreciates relative to dollars, became stable from 1994to

1998 and continued to depreciate till 2015. For instance, the sharp fall in the price of

crude oil from 105.87 dollars per barrel in 2013 to 96.29 dollars per barrel in 2014 further

4
depreciated the Naira exchange rate from N157.311 per dollar to N158.553 per dollar

respectively. Osuji (2015) opined that this led the monetary authorities to devalue the

Naira twice between September 2014 and June 2015 after it was no longer sustainable to

continue the defense of the Naira by depleting the Nigeria’s foreign exchange reserves.

Lastly, the importance of the macroeconomic variables: money supply and crude oil

prices in determining the fluctuations in the exchange rate of the Nigerian currency

cannot be overemphasized.

The motive of this study is to highlight how the efficiencies and inefficiencies in

the administration of monetary policy (which is directly related to the issue of supply of

money in an economy) and how the lack of diversification of the economy from a mono

product economy (which solely relies on the export of crude oil as a major source of

external revenue) can impact the exchange rate. To further give an orientation of the

motive behind this present study, foreign exchange regimes in Nigeria (especially from

the SAP era) have been highlighted with a view to understanding the trends in the

exchange rate. In similar vein, the trends in crude oil have also been established and

money supply in Nigeria has been briefly described. At the end of this study, a

conclusion can be drawn as to whether Nigeria is making progress with respect to the

formulation of monetary policy and whether any development has been achieved with

respect to the diversification of the country’s export base in recent times.

5
1.2 Statement of the Problem

The government of Nigeria often intervenes in the foreign exchange market to

influence the exchange rate but does not commit itself to maintaining a certain fixed

exchange rate or some narrow limit around it. This intervention is usually in the form of

supplying the domestic market with foreign exchange (from its foreign reserves which is

estimated to be around US$39 billion as at December 2022) when there is a shortfall in

FX in the economy (thereby mopping up excess Naira in the FX market). This is aimed at

preventing a depreciation of the Naira relative to the US Dollars which will put pressure

on the prices of goods and services in Nigeria. Furthermore, the Central Bank of Nigeria

(CBN) as the apex bank in the country on a regular basis (usually every 2 to 3 months)

formulate monetary policy which is aimed at influencing the supply of money in Nigeria.

Lastly, crude oil which is a primary product is subject to fluctuations in the international

market and as such beyond the control of either the CBN or the Nigerian Government.

Bearing these in mind, it is much easier for monetary policy to be formulated than for

crude oil prices to be influenced.

In recent times, the exchange rate (Naira to US Dollars) has been on the high side

(N723 to US$1 as at April 2023 in the black market and N425 to US$1 in the official

window). They many explanation given for this is the shortfall in FX to meet towering

demands – meaning that there is excess demand for the US Dollars relative to the supply.

This had resulted to constant devaluation in the past. The singular question on the lips on

many Nigerians is that: what can the Government do to bring the exchange rate to a level

6
that would be considered fair? So many have argues that monetary policy or money

supply has a huge role to play. By expanding the supply of money in Nigeria, interest rate

will fall and this will serve as an incentive for local producers to borrow and invest. This

investment will increase domestic output and spur economic growth and help attract FDI

which will result in FX inflows in Nigeria and by so doing, exchange rates will be

stemmed and exports proceeds will increase and this will have a multiplier effect on the

diversification of the economy initiatives that has been a long standing issue in Nigeria.

The problem now is that what is the optimal level of monetary policy that can be

applied to achieve a stable exchange rate in Nigeria given the proliferation of the

exchange rate regimes in Nigeria? The continuous depreciation in the value of Naira, the

disequilibrium in the foreign exchange market, the external imbalances and the high

incidence of capital flight that resulted from the reform is more worrisome. The

proliferation of exchange rate systems, especially in Nigeria which restricted the forces

for long, suggest that further attention should be given to the degree; to which these

regimes influence the behaviour of economic fundamentals, including the flow of money

supply and prices of crude oil amongst others. To address this issue, this study is being

carried out to investigate the impact of money supply and crude oil prices on exchange

rates in Nigeria.

1.3 Research Questions

This study will provide answers to the following questions:

i. What is the impact of money supply on exchange ratein Nigeria?

7
 ii. What is the impact of crude oil prices on exchange rate in Nigeria?

iii. What is the impact of inflation on exchange rate in Nigeria?

1.4 Research Objectives

The broad objective of this research study is to empirically evaluate the effect of

money supply and crude oil prices on exchange rate in Nigeria. The specific objectives

are as follows:

i. To investigate the short-run and long-run impact of changes in money supply

on exchange rates in Nigeria.

ii. To evaluate the short-run and long-run impact of changes in crude oil prices on

exchange rate in Nigeria.

iii. To examine the short-run and long-run impact of inflation on exchange rate in

Nigeria.

1.5 Research Hypothesis

The following hypothesis would be tested in this study:

H01: Money supply has no significant impact on exchange rate in Nigeria.

H02: Crude oil price has no significant impact on exchange rates in Nigeria.

H03: Inflation has no significant impact on exchange rates in Nigeria.

8
1.6 Significance of the Study

The significance of this research work lies in the fact that if the appropriate

exchange rate policy is formulated and implemented, the Nigerian economy will rapidly

grow and develop into an advanced one. This is so because if inappropriate exchange rate

policy is formulated and implemented, it could badly affect the movements of

macroeconomic variables. Importantly, this study would help the Monetary Policy

Committee of the Central Bank of Nigeria (CBN) to adopt the policy that suits the

economy best this will enhance growth and development of the economy. It will also be

of great help to industries in Nigeria. On academic and practical grounds, industries are

one of the badly affected stakeholders of any poor macroeconomic policy. The findings

from this study will help guide their internal planning processes with a view to enabling

them to make better decisions on both the production and distribution of their goods and

services. the effects of Also, there are several literature on the subject matter of this

study. On academic and theoretical grounds, money supply has positive impact on

exchange rate. This is the same for crude oil prices. But this study has discovered some

research gaps it tends to fill. This research gap arises from the fact that previous

researchers have independently studied the effect of the two variables of this study:

money supply and crude oil price on exchange rate in Nigeria, and a few of them have

studied these variables jointly in relation to exchange rates.This present study aims to

widen the growing literature on the effect of money supply and crude oil prices on

exchange rates in Nigeria andwould serve as a guide to future researchers on this topic.

9
1.7 Scope and Limitation of the Study

This scope of this study relates to the period the study intends to cover. Firstly,

this study will examine issues related to exchange rate policy formulation and

implementation as well as money supply and crude oil prices in Nigeria. The study will

also pay attention to theories as well as concepts related to each of the variables that

make up the topic of the research. Lastly, the study will cover the periods: 1986 to 2022.

The decision to use this period is due to the availability of data needed to effectively

carry out this study.

However, this study like any other study especially in social sciences is not

without limitations. The researcher is constrained majorly by finance. Despite this

constraint, the researcher shall ensure that the findings of this study are greatly reliable.

1.8 Organization of the Study

The research work is organized in five chapters. Chapter one of the study consists

of the general introduction to the research: background of the study, statement of the

problem, objectives of the study, research questions, and significance of the study, scope

and limitation of the research. Chapter two presents the literature review and theoretical

framework where previous work related to the research will be reviewed. In chapter

three, the research methodology will show methods to be used for data collection for the

research. Chapter four is where data collected from the relevant credible sources will be

analyzed, presented and interpreted to verify the hypothesis of the study. Lastly, chapter

10
five will contain the summary of the findings of this study. conclusion and

recommendations are regards to the subject of this research topic.

11
 CHAPTER TWO

LITERATURE REVIEW

2.1 Introduction

The focus of this chapter is to review of relevant literature concerning the subject

matter. A literature review is an account that has been published by scholars that are

accredited. It reviews the critical points of current knowledge and methodological

contributions to the subject matter. Also, the concepts related to money supply, crude oil

prices and exchange rate shall all be discussed in this chapter as well as empirical studies

on the subject matter.

2.2 Conceptual Literature Review

2.2.1 Concept of Money Supply

Money supply is the amount of money within a specific economy available for

purchasing goods or services. A country’s money supply is known as its “stock of

money”, The money supply (M) of a country can be defined as “the sum of all

commodity money, fiat money and bank money that are held by non-banking public at

given period of time” (Abdullahi, 2009). World Bank (2013) defined money supply

growth as the average annual growth rate in money and quasi money. Money and quasi

money comprise the sum of currency outside banks, demand deposits other than those of

the central government, and the time, savings, and foreign currency deposits of resident

sectors other than the central government. Furthermore, Money Supply or Money Stock

could be used to refer to the total amount of money held by the non-bank public at a point

12
in time plus current account deposits in banks withdrawable by cheque. Money Supply is

very important because it is believed that it is an important instrument in controlling

inflation. It is, however, noteworthy that there is no single accepted concept of what

makes up money supply. Ekezie (2017) collaborates when he stated that “economists

have not been able to agree on the best definition of money”. He further added that “there

is honest disagreement as to the best definition of money and the best measure of money”

Thus there are varying conceptions of what is money supply but there are some basic

acceptable versions.

Money Supply (MS) is a term not easily agreed upon as to its precise meaning.

Money supply also called Money Stock could be used to refer to the amount of money in

the hands of the non-bank public at a point in time and some balances in commercial

banks. There are several ways of measuring such an amount (also called monetary

Aggregates) but each includes Currency in Circulation (c) Plus Demand Deposits (DD).

Demand Deposit refers to balances in current accounts of customer’s withdrawable by

cheque. The Central Bank of Nigeria (CBN) as well as public and private analysts shows

interest in the growth of Money Supply because of the impact it is believed to have on

real economic activities and the general price level (P). Money supply is considered an

important instrument for controlling inflation. Economists believe that growth in Money

Supply will lead to inflation if demand for money is stable so that increase in Money

Supply is not met by equal increase in demand. Changes in Money can be inflationary or

deflationary. When the Central Bank expands Money Supply, inflation occurs and when

13
it reduces money supply deflation occurs. Central Bank’s expansionary and concretionary

policy is carried out through the Fractional Reserve Banking which enables Commercial

Banks to create money by credit expansion.

Money supply can be broken down into: M 1 – known as the narrow definition, it

looks at Money Supply in terms of currency in circulation in form of paper currency and

coins (c). To this is added Demand Deposit in form of balance in customer’s current

accounts in Banks. Thus we have M 1 = C+DD. This definition is associated with J.M.

Keynes. M2 – some economists have included to M1 amount held in savings and Time

Deposits. The argument is that even though holders of these accounts do not issue

cheques payable on demands, they can easily go to the bank and make immediate cash

withdrawals. Even for fixed deposits, they can terminate their fixed deposits by paying

some penalties and collect cash ahead of expiry. We thus have M 2 = C+DD+STD (STD

means saving and Time Deposits). This broader definition is propagated by Milton

Friedman and modern monetarists. This is the definition generally accepted by the CBN

when it talks of money aggregates. M3 some economists have gone further to define

money supply, in terms of M1 + M2 plus near-money such as postal orders, Money Orders

and other readily marketable instruments. They argue that such near-monies can be sold

easily for cash and may also be used as collateral to secure loans from banks. This

broadest definition is popularized by Gurley and Shaw in the late 1950s. Thus M 3 =

M1+M2 + Near Monies.

14
2.2.2 Concept of Crude Oil

Crude Oil is something that occurs naturally. It is unrefined petroleum product that

contains hydrocarbon deposits. Crude oil has ranging viscosity and it can vary in colour

to various shades of black and yellow depending on its hydrocarbon composition. It is

heated and separated in different components; it is the first stage in refining. It is also and

often called black gold, Encyclopedia of earth. Crude Oil is a liquid found within the

earth compromised of hydrocarbons, organic compounds and small amounts of sediments

and metal. Within the industry, people talk about ‘Crude Oil’ as if it is just one standard

liquid form. However, this is far from the truth. Crude Oil extracted from the ground in

its natural unrefined state varies considerably in its density and consistency, from a very

thin and volatile liquid to extremely thick, semi-solid heavy weight oil. Furthermore, the

colour of Crude Oil extracted from the ground can range substantially, from a light

golden yellow to a deep dark black. As we have now established, ‘Crude Oil’ is a term

used to describe many different types of raw oil extracted from the ground. Within the

industry, we categorize these different types into four main categories based on three

factors: their viscosity, volatility, and toxicity. Viscosity refers to the oils ability to flow.

Higher viscosity oils do not flow as easily and therefore take more energy and effort to

pump from the ground. Volatility describes how quickly and easily the oil evaporates into

the air. Higher volatility oils need additional processes to control their environments

during extraction to ensure that as little oil as possible is lost. Toxicity refers to how

poisonous and harmful the oil is to the environment, wildlife, and humans during the

15
extraction and refinement process. When oil spills do occasionally occurs, each oil poses

different challenges and priorities during the cleanup.

The four main types of Crude Oil are:

i. Very light oils – these include: Jet Fuel, Gasoline, Kerosene, Petroleum Ether,

Petroleum Spirit, and Petroleum Naphtha. They tend to be very volatile,

evaporating within a few days which in turn evaporates their toxicity levels.

ii. Light oils – These include Grade 1 and Grade 2 Fuel Oils, Diesel Fuel Oils as

well as Most Domestic Fuel Oils. They are both moderately volatile and toxic.

iii. Medium oils – These are the most common types of Crude Oil. They generally

have low volatility and a higher viscosity than the light oils which leads to

higher toxicity and a greater environmental impact during cleanups.

iv. Heavy fuel oils – These include the heaviest Grade 3,4,5 and 6 Fuel Oils along

with Heavy Marine Fuels. These are the most viscous and least volatile Crude

Oils as well as the most toxic.

Furthermore, based on classification of crude oil, The petroleum industry often names

crude based on the oil's geographical source, for example, “West Texas Intermediate.”

Crude oil is also classified based on physical characteristics and chemical composition,

and these qualities are described with terms such as “sweet,” “sour,” “light,” and

“heavy.” Crude oil varies in price, usefulness, and environmental impact.

16
2.2.3 Concept of Exchange Rate

Exchange rate is the rate at which a currency is exchanged for another currency. It

is referred to as the ratio at which a unit of currency of one country is expressed in terms

of another currency. According to Jhingan (2004), the exchange rate between the dollar

and the pound refers to the number of dollars required to purchase a pound. dollars

required to purchase a pound. The rate is normally determined in the foreign exchange

market. The foreign exchange market is a market where currencies of different countries

are bought and sold. It is a market where the values of local and foreign currencies are

determined. As noted by Jhingan (2004), the national currencies of all countries are the

stock-in-trade of the foreign exchange market, and as such, it is the largest market to be

found around the world which functions in every country. Types of exchange rate system

or policy are: fixed exchange rate; floating exchange rate and managed floating exchange

rate. Countries of the World have objectives for adopting an exchange rate system. The

objectives of foreign exchange rate are as follows:

i. Attract foreign investment

ii. To discourage importation

iii. Encourage exports

iv. Improve balance of payment position

v. To ensure a favourable terms of trade

17
2.2.3.1 Factors Affecting Exchange Rates

According to both Jinghan (2004), factors that cause changes in demand and

supply in the foreign exchange market are responsible for changes in exchange rates.

These factors include but not limited to the values of import and export; inflation rate;

interest rate; competitiveness of a country in the global market etc. When the imports are

more than exports, the demand for foreign currency increases and the rate of exchange of

the foreign currency will increase. Also, when the exports are more than the imports, the

demand for the foreign exchange will decrease and the rate of exchange for domestic

currency will increase while that of the foreign currency will fall. Jinghan (2004) also

says that short term of long –term capital movement also influence the exchange rate.

Capital flows tend to appreciate the value of currency of the capital importing country

and depreciates the currency value of the capital exporting country. The exchange rate

will move in favour of the capital importing country and against the capital exporting

country. The demand for the currency of the capital –importing country will rise and its

demand curve will shift upward to the right and the exchange rate will be determined at a

higher level, given the supply curve of foreign exchange. According to him stock

exchange operation in foreign securities, debentures, stock and shares etc. exert

significance influence on the exchange rate.

If the stock exchange help in the sale of securities debentures, shares etc. to

foreigners the demand for domestic currency will rise on the part of the foreigners and

the exchange rate also tends to rise. The opposite will be the case to the foreigners

18
purchasing securities, debentures, shares etc. though the domestic stock exchanges.

According to him also, structural changes is another important factor that influences the

exchange rate of a country. Structural changes are those changes, which bring changes in

the consumer demand for commodities. They include technological changed etc. which

also affect the cost structure along with the demand for products. Such structural changes

tend to increase the demand for domestic products. It implies increase in exports, greater

demand for domestic currency, appreciation of its value and rise the exchange rate.

To Paul et.al. (2017), capital flow from one country to another brings changes in

the rate of exchange. Banking operation affects the exchange rate. This is courtesy of the

fact that banks are the dealers in foreign exchange. Banking operations that accept

exchange for the purchase of bank drafts, letters of credit, arbitrage, dealing in bills of

exchange etc. Changes in the bank rate also influence the exchange rate. If the bank rate

rises relative to other countries, there will be inflow of foreign capital with a view to

earning higher interest. As a result, the supply of foreign currency increases and the rate

of exchange move against the foreign currency and in favour of home currency. On the

other hand, when the bank rate is reduced there will be an outflow of foreign capital. This

reduces the supply of foreign currency and the exchange rate move in favour of the

foreign currency and against the home currency. If the speculators expect the value of the

currency they begin to buy the currency in order to sell it in future to earn profit. By

doing so they tend to increase the demand for the currency and raise its value and if they

expect or anticipate a fall in the future value of the currency they will sell their holdings

19
in that currency as a result of this the exchange rate of that currency will fall lower. When

the government of a country gives protection to the domestic industries it tends to

discourage imports from other countries. As a consequence, the demand for foreign

currency will decrease and the rate of exchange will move in favour of the home currency

and against the foreign currency.

2.3 Theoretical Literature Review

In this section, brief theories as they relate to money supply, crude oil and

exchange rate will be discussed briefly.

2.3.1 Theories on Money Supply

The Quantity Theory of Money

The classical quantity theory of money states that the price level is a function of

the supply of money. Algebraically, MV=PT, where M, V, P and T are the supply of

money, the velocity of money, price level and the volume of transactions (or real output)

respectively. The equation tells us that the total money supply MV equals the total value

of output PT in the economy (Jhingan, 2004). In this theory, the classical economists

believe in the long-run economy, where full employment is attained. They recognized the

existence of unemployment in the event of a downward rigidity of money wages. Such a

situation could be corrected by an expansionary monetary policy. Suppose the monetary

authority increases the money supply, given the velocity of money and the level of real

output, with the income in the money supply, liquidity rises with the people who increase

20
the demand for goods and services, this, in turn, raises the price level. The rise in price

level reduces the real wage which provides incentives for employers to expand

employment and output towards the full employment level.

The Keynesian Theory

Keynes (1936) rejected the Quantity Theory of Money in the short run because

their assumptions (Y) was fixed at full employment and V was fixed) do not apply in

uncertainty real world with high level of unemployment. Keynes argues that changing in

money supply is not the only reason for changing in the general price level, but there is

another variable affects the price level which is the employment of production factors. In

the case of absence of full employment, the increase in the money supply will lead to

increase in total spending and then increased the total output. When the economy reaches

the level of full employment, the increase in money supply only leads to higher prices.

Thus, the money supply is non-neutral when the economy operated at less than the full

employment level, where there is indirect effect of money supply on economic activity,

through the influence of money supply on interest rates, and the investment and output

(Marshal, 2016).

The Monetarist Theory

The monetarists, following from the Quantity Theory of Money (QTM), have

propounded that the quantity of money is the main determinant of the price level, or the

value of money, such that any change in the quantity of money produces an exactly direct

21
and proportionate change in the price level. The QTM is traceable to Irving Fisher’s

famous

equation of exchange: MV=PQ, where M stands for the stock of money; V for velocity of

circulation of money; Q is the volume of transactions which take place within the given

period; while P stands for the general price level in the economy. Transforming the

equation by substituting Y (total amount of goods and services exchanged for money) for

Q, the equation of exchange becomes: MV=PY. The introduction of Y provides the

linkage between the monetary and the real side of the economy. In this framework,

however, P,V, and Y are endogenously determined within the system. The variable M is

the policy variable, which is exogenously determined by the monetary authorities. The

monetarists emphasize that any change in the quantity of money affects only the price

level or the monetary side of the economy, with the real sector of the economy totally

insulated. This indicates that changes in the supply of money do not affect the real output

of goods and services, but their values or the prices at which they are exchanged only. An

essential feature of the monetarists’ model is its focus on the long-run supply-side

properties of the economy as opposed to short-run dynamics (Dornbush and Fischer,

1996).

2.3.2 Theories on Crude Oil

The Abiogenic Oil Formation Theory

This is a term used to describe a number of different theories which propose that

fossil fuels are formed by inorganic means rather than, by the decomposition of

22
organisms. The abiogenic oil formation theory suggests that crude oil is the result of

naturally occurring and possibly ongoing geological processes. This theory was

developed in the Soviet Union during the Cold War, as it needed to be self sufficient in

terms of producing its own energy. In its simplest form, the theory is that carbon present

in the magma beneath the crust reacts with hydrogen to form methane as well as a raft of

other mainly alkane hydrocarbons.

The Fischer–Tropsch Synthetic Process

This theory postulates that collection of chemical reactions that convert a mixture

of carbon monoxide and hydrogen into liquid hydrocarbons. It was first developed by

Franz Fischer and Hans Tropsch in Germany, in 1925. The process, a key component of

gas to liquids technology, produces a synthetic lubrication oil and synthetic fuel, typically

from coal, natural gas, or biomass. The Fischer–Tropsch process has received intermittent

attention as a source of low-sulfur diesel fuel and to address the supply or cost of

petroleum-derived hydrocarbons.

2.3.3 Theories on Exchange Rate

The Mint Parity Theory

This theory is associated with the working of the international gold standard.

Under this system, the currency in use was made of gold or was convertible into gold at a

fixed rate. Here, the value of the currency unit was defined in terms of certain weight of

gold and the Central Bank of the country concerned was always ready to buy and sell

23
gold at the specified price. The rate at which the naira could be converted into gold is

called the mint price of gold. The mint parity or mint par of exchange was the

comparison of these values with each one. But the actual rate of exchange could vary

above and below the mint parity by the cost of shipping gold between the two countries.

A country is said to be on the gold standard if:

i. The standard monetary unit is defined in terms of gold, that is, either it is

made of gold or is convertible into gold at fixed rates.

ii. The government buys and sells by unlimited quantities at officially fixed

price.

iii. There are no restrictions in the export and import of gold.

The mint parity theory states that under gold standard the exchanges rate tends to stay

close to the ratio of gold values or the mint parity or par. In other words, the rate of

exchange between the gold standard countries is determined by the gold equivalents of

the concerned currencies. According to S.E. Thomas, the mint par is an expression of the

ratio between the statutory bullion equivalents of the standard of monetary unit of two

countries on the same metallic standard. Thus when the currencies of different countries

are defined in gold, the exchange rate between such currencies is automatically

determined on a weight to weight basis of the gold content of their currencies after

making allowance for the parity of such gold content of these currencies.

The Purchasing Power Parity (PPP) Theory

24
 The purchasing power parity (PPP) is one of the earliest and perhaps most popular

theory of exchange rate. This posits that the exchange rate between two currencies would

be equal to the relevant national price levels. It assumes the absence of trade barriers and

transactions cost and existence of the purchasing power parity (PPP).

There are two versions of the purchasing power parity theory. The versions are:

i. The Absolute Version and

ii. The Relative Version

According to absolute version of the purchasing power parity theory, the rate of

exchange should normally reflect the relation between the internal purchasing power of

the different national currency units. In other words, the rate of exchange equals the ratio

of outlay required to buy a particular set of goods at home as compared with what it

would buy in a foreign country. With an absolute PPP, the exchange rate between two

countries’ A and B currencies can be illustrated below:

Exchange Rate, R = Units of Currency A X Internal Purchasing Power of A

Units of Currency B Internal Purchasing Power of B

Since the internal purchasing power of each currency is the reciprocal of the

general price index in those respective countries, the above expression can be restated

thus:

R = Units of Currency A X Price Index in Country A

Units of Currency B Price Index in Country B

Also, since the units of currency of countries A and B can purchase equal set of

commodities (Q0), R can be expressed as:

25
 R = Q0X PB

Q0 PA

The Balance of Payment Theory

The balance of payments theory of exchange rate maintains that rate of exchange

of the currency of one country with the other is determined by the factors which are

autonomous of internal price level and money supply. It emphasises that the rate of

exchange is influenced, in a significant way, by the balance of payments position of a

country. A deficit in the balance of payments of a country signifies a situation in which

the demand for foreign exchange (currency) exceeds the supply of it at a given rate of

exchange. The demand for foreign exchange arises from the demand for foreign goods

and services. The supply of foreign exchange, on the contrary, arises from the supply of

goods and services by the home country to the foreign country. In other words, the excess

of demand for foreign exchange over the supply of foreign exchange is coincidental to

the BOP deficit. The demand pressure results in an appreciation in the exchange value of

foreign currency. As a consequence, the exchange rate of home currency to the foreign

currency undergoes depreciation. A balance of payments surplus signifies an excess of

the supply of foreign currency over the demand for it. In such a situation, there is a

depreciation of foreign currency but an appreciation of the currency of the home country.

The equilibrium rate of exchange is determined, when there is neither a BOP deficit nor a

surplus. In other words, the equilibrium rate of exchange corresponds with the BOP

equilibrium of a country.

26
 The balance of payments theory of rate of exchange has certain significant merits.

Firstly, this theory attempts to determine the rate of exchange through the forces of

demand and supply and thus brings exchange rate determination in purview of the

general theory of value. Secondly, this theory relates the rate of exchange to the BOP

situation. It means this theory, unlike PPP theory, does not restrict the determination of

rate of exchange only to merchandise trade. It involves all the forces which can have

some effect on the demand for and supply of foreign currency or the BOP position.

2.4 Empirical Literature Review

2.4.1 Money Supply and Exchange Rate

There has been a ton of empirical research carried out to evaluate the impact of

money supply on exchange rate in Nigeria. A reviewers of some of the literatures are

given below:

Okereke, Ezeji and Obinna (2021) examines the impact of money supply in determining

the exchange rate of the currency with respect to fixed and flexible exchange rate policies

in Nigeria. Time series data, sourced from Central Bank of Nigeria (CBN) was used.

Money supply (MS) was decomposed to include Narrow Money Supply (M 1), quasi

money (Qm) and Broad Money Supply (M2). Econometric analysis based on the least

squares procedure was conducted using E-View Version 7. Descriptive analysis was also

carried out. It was found from the study that periods of floating exchange rate policy have

influenced exchange rate positively even to a great extent and that quasi money showed a

negative and significant sign on exchange rate, while narrow money exhibits a positive
27
sign. Broad money supply indicates that expansionary monetary policy tends to diminish

the Naira/ Dollar value. It is therefore recommended among others, that the Nigerian

financial market in general and money market in particular should be strengthened in

both depth and breath. The available money outside the banking system should be

properly channelled for productive purposes in order to achieve the desired stability in

the naira exchange rate and by extension growth in the Nigerian economy.

Abdullahi and Kime (2020) evaluated the impact or effect of money supply on

exchange rate in Nigeria using quarterly data ranging from 1990 to 2019. In analyzing the

data both ordinary least square (OLS) regression method and Autoregressive distributed

lag (ARDL) bound F-test for co integration were used. Variables for this study are

(inflation, money supply growth M1& M2, interest rate, exchange rate and fiscal deficit).

The OLS result indicates narrow money supply growth M1, interest rate and fiscal deficit

are positively related to exchange rate. While broad money supply growth M2 and

exchange were negatively related to exchange rate. Bound F-test for co-integration result

indicates that there is an evidence of long run relationship between money supply

growths when inflation is used as dependent variable. However granger causality result

revealed that there is a unidirectional causality running from money supply growth to

exchange rate in Nigeria which is in tandem with classical quantity theory assertion.

Finally, the study recommends a long term stabilization of monetary policy instrument

especially the open market operation (OMO) and the need for government to reduce its

deficit financing.

28
 Umeora (2020) examines the effects of money supply (M2) on Exchange Rates in

Nigeria for the period of 28 years ranging from 1992 to 2019. Annual figures were

collated for Inflation rate, money supply and Exchanges rates for the years under study.

The figures were analyzed using Multiple Regression Analysis (with SPSS). Results

show that while Money Supply and Exchange Rate are correlated, each affects inflation

in varying degrees. Money Supply and Exchange Rate are correlated; each affects

inflation in varying degrees. Money supply has positive effect on exchange rate. The

study recommended that policy makers should continue to introduce measures to control

money supplyin order to ameliorate its effect on exchange rate.

George, Suoyai and Tema (2020) investigate the impact of money supply on

macroeconomic variables e.g exchange rate in Nigeria from1985 to 2019. The ex-post

facto research design and descriptive statistics were used to observe the variables in

retrospect. The ordinary least square technique was employed to determine the magnitude

and direction of the variables in the models. It emerged that narrow money supply has a

positive and significant impact on exchange rate. The paper recommends that efforts

should be put in place to better the exchange rate between the naira and other currencies.

This will help avoid the imported inflationary pressure on goods and services in the

country.

2.4.2 Crude Oil Prices and Exchange Rate

Sanusi (2020) empirically examined the asymmetric impacts of oil prices on

exchange rate volatility in oil-exporting developing countries. The study uses a nonlinear

29
ARDL model to investigate the presence or otherwise of asymmetric relations between

crude oil prices and exchange rate volatility from 1995 to 2019. The annual data was

collected from WDI for 25 developing oil-exporting countries. Empirical evidence

suggests the presence of asymmetric relationship in both short and long run. Price of oil

has a long-run asymmetric impact on volatility of exchange rate, with the decrease in oil

price, and is significantly related to exchange rate volatility, while the increase in oil

price is not. The study concludes that crude oil price increase does not significantly affect

exchange rate movement or volatility in the selected countries while crude oil price

reduction has significant effects on exchange rate volatility in both short and long run.

The study recommends that efforts must be made to prevent downward trend in oil price

in order to avoid its concomitant negative effects on the economy via the exchange rate

instability.

In his study, Olayungbo (2019) investigated the relative Granger causal effects of

crude oil price on exchange rate, trade balance, and inflation in Nigeria using seasonally

adjusted quarterly data from 1986Q4 to 2018Q1 to remove predictable changes in the

series. The presence of cointegration implied the existence of long run relationship

between the variables. The Granger causality result showed that oil price strongly

Granger caused foreign reserve in the short period. However, no Granger causal

relationships were found between oil price and trade balance and for oil price and

exchange rate. The implication of the result is that Nigerian government should not rely

30
solely on oil price to sustain her reserve but to diversify the economy towards non-

resource production and export for foreign exchange generation.

Englama, Duke and Ogunleye (2020) evaluated the impact of crude oil on

exchange rate in Nigeria using monthly data from 2000 to 2019. Drawing from the works

of Jin (2008), the authors utilized cointegration technique and vector error correction

model (VECM) for the long-run and the short-run analysis, respectively. The results

showed that a 1.0 per cent permanent increase in oil price at the international market

increases exchange rate volatility by 0.54 per cent in the long-run, while in the short-run

by 0.02 per cent. Also a permanent 1.0 per cent increase in demand for foreign exchange

increases exchange rate volatility by 14.8 per cent in the long-run. The study reaffirms

the direct link of demand for foreign exchange and oil price volatility with exchange rate

movements and, therefore, recommends that demand for foreign exchange should be

closely monitored and exchange rate should move in tandem with the volatility in crude

oil prices bearing in mind that Nigeria remains an oil-dependent economy.

Aliyu (2019), assessed the impact of oil price shock and real exchange

ratevolatility on the real gross domestic product in Nigeria using quarterly data that’s pan

the period 1986 to 2017. He used the Johansen VAR-based cointegration technique to

examine the sensitivity of real GDP to change in oil prices and real exchange rate

volatility in the long-run while the vector error correction model was used in the short-

run. The result of the long-run analysis indicated that a 10.0per cent permanent increase

in crude oil prices increases the real GDP by 7.72per cent, similarly a 10.0 per cent

31
appreciation in exchange rate increases GDP by 0.35 per cent. The short-run dynamics

was found to be influenced by the long-run equilibrium condition. He recommended the

diversification of the economy and infrastructural diversification.

Sosunov and Zamulin (2017) supported the findings of Rautava (2014); they used

a calibrated general equilibrium model to examine whether the 80 per cent real

appreciation of the Russian ruble in 1998-2015 can be explained by the increase

in oil revenues. The result indicated that the oil price alone is insufficient to explain

the appreciation of the Russian ruble without assuming permanent increase in oil

price. The study, therefore, concludes that accounting for the increase in the

volume of oil exports could only be significant if oil prices are assumed

permanent.

Korhonen and Juurikkala (2017) used basic data from OPEC countries for the

period 1985 to 2015 to examine the determinants of equilibrium real exchange

rates in some selected oil-dependent countries. The authors included three oil-

producing Commonwealth of Independent States (CIS) countries in the analysis.

They utilized different estimation techniques that included pooled-mean group

and mean-group estimators. The result indicated that oil price had significant

effect on real exchange rates in the group of oil-producing countries. It showed

that higher oil price cause real exchange rate appreciation. The elasticity of the

real exchange rate with respect to the oil price ranges from 0.4 and 0.5,but may

be larger depending on the specification.

32
2.5 Research Gap

The literature reviewed above showed that there is no consensus as to the direction

through which crude oil prices and money supply affect exchange rate. While this is

ideal, the choices of variables used by the researchers seem not to be robust. Also, none

of the reviewed studies examined the joint impact of money supply and crude oil prices

on exchange rate volatility; rather, they disintegrated both variables and studied their

impact on exchange rate individually.

As a result of the above, this present study will examine the joint impact of money

supply and crude oil prices on exchange rate volatility in Nigeria. While at that, robust

variables that will capture these impacts would be used in this study. This will add to the

credibility of the findings from this study and add to the growing literature on the subject

matter.

33
 CHAPTER THREE

METHODOLOGY

3.1 Introduction

This chapter centered on the methodology adopted in the study. The chapter

contained model specification, techniques of data analysis and the nature and sources of

data for the study will be captured in this chapter.

3.2 Methodology

The study follows an econometric research methodology. The kind of tool to be

applied is the Ordinary Least Square (OLS) method in estimating the relationship

between the exchange rate stability and export performance. The choice of this method is

based on the “BLUE” property of the OLS estimates, that is, Best Linear Unbiased

Estimator. This is because it helps to quantitatively ascertain the impact of certain factors

on a given phenomenon under study.

3.3 Sources of Data

The sources of data used for this study are as follows:

S/N Variable Source of Data

1 Exchange rate CBN Annual Statistical Bulletin (2022)

2 Money supply CBN Annual Statistical Bulletin (2022)

3 Crude oil price OPEC Annual Statistical Bulletin (2022)

4 Inflation CBN Annual Statistical Bulletin (2022)

34
3.4 Model Specification

The broad objective of this study is to examine the impact of money supply and

crude oil prices on exchange rate in Nigeria To achieve this, the empirical model is

adopted from the work of Umeora (2020). The functional relationship among these

variables is stated below:

EXR = f(MSS, COP, INF)……………………………………….3.1

Due to other factors or variables that affect exchange rate, eqn.1 is expressed in an

econometric form (adopting a log-log model in order to interpret the coefficients as

elasticities) as stated below:

LogEXR = β0+ β1LogMSS + β2LogCOP +β3LogINF+ µ…………………………..3.2

Where EXR = Exchange rate

MSS = Money supply

COP = Crude oil price

INF = Inflation rate

β1 – β3= Slope and intercept parameters to be estimated.

µ = Stochastic (random) error term

In accordance with a priori criteria, β1 and β3 are positive while β2 is negative.

35
3.5 Data Evaluation Techniques

3.5.1 Descriptive Statistics

This would be carried out to summarize the properties of the data used in this

study. Statistical parameters like mean, mode, skewness, kurtosis etc. would be contained

in this section.

3.5.2 Unit Root Test

This test is very important to avoid spurious regression analysis that is associated with

non-stationary time series and that the variables are stationary or time invariant. The unit

root test also shows the order of integration of the variables. There are various tests for

unit root. Examples are the Phillips-Perron (Phillips & Perron, 1980) unit root test, the

Kwiathowski-Phillips-Schmidt-Shin (KPSS) unit root test, the Augmented Dickey-Fuller

(Dickey & Fuller, 1981) unit root test, etc. The widely-used Augmented Dickey Fuller

(ADF) unit root test will be employed to check for stationarity of the variables used in

this study.

1. Co-integration: This test would be carried out to test for the existence of a long

run relationship among the variables used in this research work. It is basically

based on the idea that there is a long run co-movement between trended economic

time series so that there is a common equilibrium relation which the time series

have a tendency to revert to.

The Autoregressive Distributed Lag (ARDL) approach to Cointegration developed by

Pesaran, Smith and Shin (2001) will be adopted in this study. The ARDL can be

36
employed without regarding whether the variable are integrated of purely order zero or

purely order one I(0) or I(I) or of mixed orders of integration. Again, the ARDL method

offers unbiased estimates of the long-run model and validity statistic even when some of

the variable is endogenous.

3.5.3 Economic (a priori) Test

The economic (a priori test) shall be conducted to enable us examine the

magnitude and size of the parameters estimate. This evaluation is guided by economic

theory to ascertain if the parameter estimate conforms to expectation or not. In

accordance with economic theory, β1 will be negative which implies that money supply

has a negative impact on exchange rate (β 1 <0), β2 will be positive which implies that

crude oil price has a positive impact on exchange rate (β2 >0), and β3will be negative

which implies that inflation has a negative impact on exchange rate (β3<0).

3.5.4 Statistical (First-order) Test

Here, the following tests shall be conducted:

1. Goodness of fit test: To do this, R2 which is the coefficient of multiple

determination will be used. R2 tells us how the changes in the dependent variables

are explained by the changes in the independent variables.

2. Student’s t-test: This will be used to ascertain the significance of the individual

independent variables. The variables will be tested at 5% significance level with

an-k degree of freedom.

37
 3. f-test: The overall significance of the regression model will be tested using the f-

test of overall significance. That is, the joint impact of the independent variables

on the dependent variable will be tested using the f-test. It will also be tested at the

5% level of significance with (k-1) (n-k) degree of freedom.

3.6 Short-run Diagnostic and Stability Tests

1. Heteroscedasticity: Another assumption of the Classical regression model is that

the variance of the error terms in a model is constant or homoscedastic. Thus, if

the reverse is the case, we can say that the variance of the error terms is not

constant or it is heteroscedastic. To test for this, the Breusch-Pagan-Godfrey

heteroscedasticity test shall be used. The null hypothesis of the test is that the

variance of the residuals is constant or homoscedastic and decision rule for the test

is to reject the null hypothesis if the probability value of the chi-square is lesser

than 0.05 and to fail to reject the null hypothesis if otherwise.

2. Serial Correlation: This test is usually conducted to check for serial correlation in

the random error terms in a regression model. The Breusch-Pagan Serial

Correlation LM test was used to test for the presence of serial correlation in the

random error terms of the model. The null hypothesis of the test is that there is no

serial correlation among the residuals of the regression model while the decision

rule is to reject the null hypothesis of no serial correlation when the probability

value of the chi-square statistics is lesser than 0.05 and to fail to reject the null

hypothesis if otherwise.

38
3. Normality Test: This test is carried out to ascertain whether the error terms in a

regression model follows a normal distribution. The Jarque-Bera (JB) Statistics

will be used to carry out the normality test. The null hypothesis here is that of

normality of the residuals and the decision rule is to reject the null hypothesis if

the probability value of the J-B statistics is lesser than 0.05 and to fail to reject the

null hypothesis if otherwise.

4. CUSUM Test: The CUSUM or the cumulative sum of the recursive residuals test

will be conducted to check for stability of the regression models. If the residuals

lie within the 0.05 confidence interval band, then the model is stable and vice

versa.

5. CUSUMSQ Test: The CUSUMSQ or the cumulative sum of squares of the

recursive residuals test will also be conducted to further check for the stability of

the models. Again, if the residuals lie within the 0.05 levels, then the model is

stable and if otherwise, the instability of the model might be due to structural

breaks.

39
 CHAPTER FOUR

DATA PRESENTATION AND ANALYSIS

4.1 Introduction

This chapter covers the analysis of the data used for the purpose of this study shall

be presented. Also, the findings of the empirical research will also be made in this

chapter. The analysis of the data in this data would be made in accordance with the

techniques outlined in chapter three of this research work.

4.2 Data Presentation

4.2.1 Descriptive Statistics

The descriptive statistics was used to summarize the data used for this study. This

isshown in table 1 below:

Table 1: Descriptive statistics

Exchange Rate Money Supply Crude Oil Price Inflation

Mean 131.2142 10817.17 47.43378 20.74258
Median 125.8331 2263.588 38.10000 13.25000
Maximum 423.7200 43818.47 111.6300 72.83550
Minimum 2.020000 27.39000 12.80000 5.386104
Std. Dev. 118.4894 13926.80 32.40580 17.49514
Skewness 0.901634 1.090467 0.699362 1.561144
Kurtosis 3.010454 2.822814 2.152367 4.210402

Jarque-Bera 5.013325 7.381290 4.123823 17.28787

Probability 0.081540 0.024956 0.127211 0.000176

Sum 4854.925 400235.4 1755.050 767.4753

Sum Sq. Dev. 505430.9 6.98E+09 37804.90 11018.87

Observations 37 37 37 37
Source: Researcher’s Computation using E-Views 2023.

40
 From the summary statistics in table 1 above, it can be seen during the years under

review, average exchange rate was 131.21 Naira per US Dollars while the average for

money supply, crude oil price, and inflation rates were 10.82 trillion Naira, 47.43 US

Dollar per barrel, and 20.74% respectively. The maximum and minimum rates of the

variables for the periods under review can also be seen from the table above. respectively.

Other descriptive statistics can be seen from the table 1 below. By the figure of the

skewness, the distribution of all the variables in the study is positively skewed or right-

hand skewed while going by the figure of the kurtosis, k > 3, indicates that the

distribution of exchange rate and inflation are leptokurtic distribution (that is, the

distribution is more peaked than a normal distribution curve with longer tails) while the

distribution of money supply and crude oil prices are platykurtic.

4.3 Unit Root Test

Given the fact that this study is dealing with time series variables, it is therefore

necessary to test for stationarity or unit root and to determine the order of integration of

each of the variables used in the study. The result of the Augmented Dickey Fuller (ADF)

unit root test is presented in table 2 below:

41
 Table 2: ADF Unit Root Test

Variable ADF Test 5% Critical Value ADF Test 5% Critical Value Order of

Statistics at [prob] Statistics at [prob] Integration

level form 1st

difference

LogEXR -3.9217 -2.9390[0.0044]*** -6.6890 -2.9412[0.0000]*** I(0)

LogMSS -0.8505 -2.9369[0.7934] -5.9535 -2.9390[0.0000]*** I(1)

LogCOP -0.7359 -2.9369[0.8259] -5.1779 -2.9390[0.0001]*** I(1)

LogINF -3.4638 -2.9390[0.0002]*** -6.8392 -2.9412[0.0000] I(0)

Source: Researcher’s computation E-views (2023).

Note: *, **, and *** denote significance at the 10%, 5% and 1% levels respectively.

The result of the ADF unit root test shows that two of the explanatory variables

are stationary after first difference while the dependent variable and inflation are

stationary at level. As a result of this mixed orders of integration, the ARDL bounds test

for co-integration shall be adopted to test for co-integration among the variables. The

results are presented in table 3.

Table 3: ARDL Bounds Test for Long-run Relationship

42
F-Bounds Test Null Hypothesis: No levels relationship

Test Statistic Value Signif. I(0) I(1)

Asymptotic:
n=1000
F-statistic 13.145 10% 2.72 3.77
K 3 5% 3.23 4.35
2.5% 3.69 4.89
1% 4.29 5.61

Finite Sample:
Actual Sample Size 35 n=35
10% 2.958 4.1
5% 3.615 4.913
1% 5.198 6.845

Source: Researcher’s Computation E-views (2023).

The results of the ARDL bounds test show that the calculated F-value of 13.145 is

greater than the 5% (and even the 1%) bounds value both at the upper or I(1) and the

lower or 1(0) bounds. As a result of this, we therefore reject the null hypothesis of no

levels relationship or no cointegration and accept the alternative hypothesis and conclude

that there is an indication of the presence of a long-run relationship among the variables.

Following the confirmation of long-run relationships in both models, therefore

proceed to estimate the short and long-run coefficients. The long-run coefficients are

shown in table 4 below.

Table 4: Long-run Estimates: Dependent Variable: LogEXR

43
 Variable Coefficient Std. Error t-Statistic Prob.

LOGMSS -0.6192 0.0604 -10.249 0.0000***

LOGCOP 0.8730 0.2085 4.1867 0.0003***
LOGINF -0.6973 0.1727 -4.0386 0.0004***

Source: Author’s computation E-views (2023).

Note: *, **, and *** indicate significance at the 10%, 5% and 1% level respectively.

Also, the result of the short-run analysis which shows the short-run estimates is

shown in table 5 below:

Table 5: Short-run Estimates

Variable Coefficient Std. Error t-Statistic Prob.

C 2.2801 0.2823 8.0758 0.0000***

D(LOGMSS) -0.0976 0.1031 -0.9460 0.0025***
D(LOGCOP) 0.0596 0.0532 1.1191 0.0430***
D(LOGINF) -0.2326 0.0555 -4.1933 0.0003***
CointEq(-1)* -0.4822 0.0631 -7.6434 0.0000***

R-squared 0.8727 Mean dependent var 0.1331

Adjusted R-squared 0.7291 S.D. dependent var 0.2663
S.E. of regression 0.1622 Akaike info criterion -0.6687
Sum squared resid 0.7891 Schwarz criterion -0.4465
Log likelihood 16.702 Hannan-Quinn criter. -0.5920
F-statistic 15.415 Durbin-Watson stat 2.1226
Prob(F-statistic) 0.0000

Source: Researcher’s Computation E-views (2023).

Note: *, **, and *** denote significance at the 10%, 5% and 1% level of significance
respectively.
4.4 Post Estimation Tests

The following post estimation tests were carried out and the results are shown
below:

44
 i. Serial Correlation: The result of the Breusch-Godfrey serial correlation LM test

is presented in table 6 below. The null hypothesis of the test is that there is no

serial correlation among the residuals of the regression model while the

decision rule is to reject the null hypothesis of no serial correlation when the

probability value of the chi-square statistics is lesser than 0.05 and to fail to

reject the null hypothesis if otherwise. Table 6 presents the result.

Table 6 Breusch-Godfrey Serial Correlation LM Test:

F-statistic 6.3486 Prob. F(2,25) 0.2359

Obs*R-squared 11.7887 Prob. Chi-Square(2) 0.1828

Source: Researcher’s computation using E-views 2023

From the result of the test, the probability value of the χ2 with 2 lags is 0.1828.

Since this value is greater than 0.05, we fail to reject the null hypothesis of no serial

correlation and conclude that there is no serial correlation among the residuals of the

model.

ii. Heteroskedasticity: The Breusch-Pagan-Godfrey heteroskedasticity test was

employed to carry out the test for heteroscedasticity. The result is shown in

table 7 below. The null hypothesis of the test is that the variance of the

residuals is constant or homoscedastic and decision rule for the test is to reject

the null hypothesis if the probability value of the chi-square is lesser than 0.05

45
 Table 7 Heteroskedasticity Test: Breusch-Pagan-Godfrey

F-statistic 7.3488 Prob. F(9,21) 0.3421

Obs*R-squared 22.9528 Prob. Chi-Square(9) 0.8717

Source: Researcher’s computation using E-views 2023

From the results of the Bresuch-Pagan-Godfrey heteroscedasticity test, with a

probability value of the Chi-square statistics at 0.8717, which is greater than 0.05, we fail

to reject the null hypothesis of constant variance of the error terms in the model and

conclude that the variance of the error term is homoscedastic or constant.

iii. Normality Test: As stated in chapter 3 of this study, this test is carried out to

ascertain whether the residuals or errors of a regression model follows a

normal distribution, i.e., whether they have a constant mean and zero variance.

The Jarque-Bera Statistics was used to check for this. The result of the test is

shown in figure 1 below.

46
 Figure 1 Jarque-Bera Normality Test Result

From the result above, we conclude the errors of the model follow a normal

distribution with a zero mean and a constant variance since the probability value of the J-

B Statistics (0.4832) is greater than 0.05.

iv. CUSUM Test: The stability of the short-run coefficients is investigated using

the cumulative sum of the recursive residuals (CUSUM). The result is shown

in figure 2 below.

47
 Figure 2: CUSUM Test

From the above graph, it can be seen that the residuals of the regression model lie

within the 5% critical band. This shows that the regression model is stable.

Also, the cumulative sum of recursive residuals (CUSUMSQ) test was also carried

out to re-establish the stability of the model. The result is shown in figure 3 below:

48
 Figure 3: CUSUMSQ Test

From the above graph, it can be seen that the residuals of the regression model

also lie within the 5% critical band. This shows that the regression model is stable.

4.5 Test of Hypothesis

H01: Money supply has no significant effect on exchange rate in Nigeria.

This hypothesis is rejected based on the results of the short-run and long-run

ARDL estimation in tables 4 and 5 above. The result revealed that there is a negative and

significant relationship between money supply and exchange rate in Nigeria.

49
Conclusion: It is concluded that money supply has a negative and significant relationship

with exchange rate.

H02: Crude oil price has no significant effect on exchange rates in Nigeria

This hypothesis is rejected based on the results of the short-run and long-run

ARDL estimation in tables 4 and 5 above. The result revealed that there is a positive and

significant relationship between crude oil price and exchange rate in Nigeria.

Conclusion: It is concluded that crude oil price has a positive and significant relationship

with exchange rate.

H03: Inflation has no significant effect on exchange rates in Nigeria.

This hypothesis is rejected based on the results of the short-run and long-run

ARDL estimation in tables 4 and 5 above. The result revealed that there is a negative and

significant relationship between inflation rate and exchange rate in Nigeria.

Conclusion: It is concluded that inflation rate has a negative and significant relationship

with exchange rate.

4.6 Discussion of Results

From table 4 above, the coefficient of money supply is negative (-0.6192) and

statistically significant. This implies that a 1% increase in money supply will lead to a

61.92% decrease or depreciation in exchange rate and vice versa in the long run. This is

because increased supply of a domestic currency relative to a foreign currency will make

the local currency to be very high in supply while the foreign currency remains limited in

supply and as such, since the supply of the foreign currency is limited, economic agents

could purchase the foreign currency with the foreign currency (mainly for hoarding), and

50
as such, the exchange rate of the local currency relative to the foreign currency will fall or

depreciate. In Nigeria today, we have seen this issue where people buy and hoard the US

Dollars with excess Naira thereby crowding out other who need the US Dollars for

transactionary purposes, little wonder that the Naira is currently exchanging for over

1,000 Naira to the US Dollars at the black market and about 780 Naira at the official

market.

Furthermore, the result also shows that the coefficient of crude oil is positive

(0.8730) and statistically significant. This implies that a 1% increase in crude oil is

associated with a 87.30% increase or appreciation in exchange rate and vice versa in the

long run. This is because when crude oil price increases, Nigeria makes more foreign

revenue since majority of Nigeria’s foreign revenue (which are usually in US Dollars)

comes from the export of crude oil. As such, with an increase in foreign revenue due to

an increased crude oil price, the government can make interventions in the foreign

exchange market to ensure that the local currency does not over depreciate by supplying

the foreign exchange market with foreign currency thereby boosting supply and FX

(foreign currency) liquidity.

Lastly, the result in table 4 also reveals that inflation has a negative and significant

impact on exchange rate in the long run. Thus, when inflation rate rises by 1%, exchange

rate depreciates or falls by 69.73% all things being equal. This is because increased

inflation rate discourages foreign investors from investing in a country. Foreign direct

investment and foreign portfolio investments are avenues through which foreign currency

51
enters a country and when there is a high rate of inflation in a country, these foreign

investments cannot be attracted.

In table 5, the short-run estimates of the model were shown. From the results, the

coefficient of money supply is negative and statistically significant. This implies that in

the short tun, the higher the supply of money, the lower the exchange rate in the short run

and a 1% increase in the supply of money will lead to a 9.76% decrease in exchange rate

and vice versa in the short run. The short run result also reveals that crude oil price has a

positive and significant impact on exchange rate and inflation has a negative and

significant impact on exchange rate in the short run and vice versa.

Furthermore, from table 5, The R-squared (0.8727) presents a goodness of fit of

the regression result. This implies that the explanatory variables explain 87.27% of the

total variations in economic growth. The rate remains high (72.91%) after being adjusted

for the degree of freedom (Adjusted R-squared). The error correction term ECM(-1) or

cointegrating equation of -0.4822 is rightly signed (negative) and statistically significant.

This implies that 48.22% of the short-run disequilibrium is corrected annually to bring

the model to a long-run equilibrium. The F-statistics test for overall significance of the

explanatory variables in the model has a probability value of 0.000 indicating the overall

significance of the explanatory variables of the regression model.

52
 CHAPTER FIVE

SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.1 Introduction

This chapter is the last chapter in this research work will focus on the summary of

the findings from this research study as well as conclusion of the study and

recommendations.

5.2 Summary

This study set out to empirically evaluate the impact of money supply and crude

oil prices on exchange rate in Nigeria using annual time series data from 1986 to 2022.

Chapter one of the study contained the introductory sections of the research study.

Contained therein were the background to the research study, statement of the problem,

research questions, significance of the study etc. In chapter two, a review of the

conceptual and theoretical literature as well the review of empirical literature that are

related to the study were carried out. The methodology adopted by the study was

described in chapter three of the research work. It highlighted the population as well as

the sample of the study etc. The data used in this study were analyzed in chapter four and

the summary, conclusion and recommendations made by the researcher were contained in

the chapter five of the study.

53
 All data used for the study were secondary and were obtained from the Statistical

Bulletin of the Central Bank of Nigeria. The findings from the study are highlighted

below:

i. The study revealed that money supply has a negative and significant impact on

exchange rate both in the short run and in the long run.

ii. It also revealed that crude oil price has a positive and significant impact on

exchange rate both in the long run and in the short run.

iii. Lastly, inflation rate has a negative and significant impact on exchange rate both

in the short run and in the long run.

The explanatory variables in the models were able to explain 87.27% of the variations

in the dependent variable and 48.22% of the short-run disequilibria in the two models

used for this study were corrected annually.

5.3 Conclusion

From the findings of this study, we can conclude that money supply and crude oil

prices negatively and positively impact on exchange rate respectively. From the findings

also, deductions that could be made from the analysis so far is that the prolonged

(accumulated) monetary shocks on exchange have shown the ineffectiveness of the

monetary policy of the CBN and other macroeconomic policies in stabilizing the rate of

Exchange over time. The implications that can be drawn from the analysis so far is that

exchange rate policy has not been supported by appropriate monetary policy of increasing

54
money supply. The result also shows that there is a need for crude oil exports to be

increased giving its positive impact on exchange rate.

5.4 Recommendations

Based on the findings from this study, the following recommendations are made:

i. The Nigerian Government should create incentives such as loans subsidy etc.

to small scale industries, thereby encouraging them to process domestic goods

into processed goods that will help diversify the economy. The diversification

of the economy would ensure that the over reliance on oil would be tackled,

thereby reducing the unnecessary pressures on the exchange rate and constant

devaluation due to volatile oil prices that leads to unpredictable revenues from

oil.

ii. There should also be adequate security to crude oil infrastructures in the

country. For so long, Nigeria has not met its OPEC quota for oil outputs due to

oil theft. There is a need for the government to put an end to this issue.

iii. To tackle inflation, the Monetary Policy Committee (MPC) of the Central

Bank of Nigeria should not only set realistic inflation targets, but also ensure

that prevailing inflation rate does not exceed the target by a wide margin.

iv. In similar vein, in order to avoid the inflationary impacts the government

should control the excessive expansion in broad money supply in Nigeria.

55
v. The monetary authorities should embark on contractionary monetary policy.

This will cause declining in the level of broad money supply and monetary

policy rateand eventually lower exchange rate depreciation in the country.

56
57
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59
 APPENDICES
Appendix 1: Eviews Outputs

ARDL Long Run Form and Bounds Test

Dependent Variable: D(LOGEXR)
Selected Model: ARDL(1, 0, 1, 2)
Case 3: Unrestricted Constant and No Trend
Date: 10/13/23 Time: 10:11
Sample: 1986 2022
Included observations: 35

Conditional Error Correction Regression

Variable Coefficient Std. Error t-Statistic Prob.

C 2.280096 0.359163 6.348362 0.0000

LOGEXR(-1)* -0.482149 0.089632 -5.379220 0.0000
LOGMSS** 0.298558 0.063960 4.667900 0.0001
LOGCOP(-1) -0.420920 0.095866 -4.390710 0.0002
LOGINF(-1) -0.336212 0.072578 -4.632422 0.0001
D(LOGCOP) 0.097560 0.121439 0.803359 0.4288
D(LOGINF) -0.059549 0.064614 -0.921617 0.3649
D(LOGINF(-1)) 0.232622 0.066103 3.519106 0.0016

* p-value incompatible with t-Bounds distribution.

** Variable interpreted as Z = Z(-1) + D(Z).

Levels Equation
Case 3: Unrestricted Constant and No Trend

Variable Coefficient Std. Error t-Statistic Prob.

LOGMSS -0.619224 0.060431 -10.24682 0.0000

LOGCOP 0.873008 0.208521 4.186663 0.0003
LOGINF -0.697321 0.172665 -4.038588 0.0004

EC = LOGEXR - (0.6192*LOGMSS -0.8730*LOGCOP -0.6973*LOGINF )

F-Bounds Test Null Hypothesis: No levels relationship

Test Statistic Value Signif. I(0) I(1)

Asymptotic: n=1000
F-statistic 13.14479 10% 2.72 3.77
k 3 5% 3.23 4.35

60
 2.5% 3.69 4.89
1% 4.29 5.61

Actual Sample Size 35 Finite Sample: n=35

10% 2.958 4.1
5% 3.615 4.913
1% 5.198 6.845

t-Bounds Test Null Hypothesis: No levels relationship

Test Statistic Value Signif. I(0) I(1)

t-statistic -5.379220 10% -2.57 -3.46

5% -2.86 -3.78
2.5% -3.13 -4.05
1% -3.43 -4.37

ARDL Error Correction Regression

Dependent Variable: D(LOGEXR)
Selected Model: ARDL(1, 1, 1, 1)
Case 3: Unrestricted Constant and No Trend
Date: 10/13/23 Time: 10:23
Sample: 1986 2022
Included observations: 35

ECM Regression
Case 3: Unrestricted Constant and No Trend

Variable Coefficient Std. Error t-Statistic Prob.

C 2.280096 0.282336 8.075827 0.0000

D(LOGMSS) -0.097560 0.103129 -0.945994 0.0025
D(LOGCOP) 0.059549 0.053213 1.119073 0.0430
D(LOGINF) -0.232622 0.055474 -4.193328 0.0003
CointEq(-1)* -0.482149 0.063081 -7.643382 0.0000

R-squared 0.872700 Mean dependent var 0.133080

Adjusted R-squared 0.729060 S.D. dependent var 0.266282
S.E. of regression 0.162179 Akaike info criterion -0.668671
Sum squared resid 0.789059 Schwarz criterion -0.446478
Log likelihood 16.70174 Hannan-Quinn criter. -0.591970
F-statistic 15.41476 Durbin-Watson stat 2.122615
Prob(F-statistic) 0.000001

* p-value incompatible with t-Bounds distribution.

61
F-Bounds Test Null Hypothesis: No levels relationship

Test Statistic Value Signif. I(0) I(1)

F-statistic 13.14479 10% 2.72 3.77

K 3 5% 3.23 4.35
2.5% 3.69 4.89
1% 4.29 5.61

t-Bounds Test Null Hypothesis: No levels relationship

Test Statistic Value Signif. I(0) I(1)

t-statistic -7.643382 10% -2.57 -3.46

5% -2.86 -3.78
2.5% -3.13 -4.05
1% -3.43 -4.37

Breusch-Godfrey Serial Correlation LM Test:

F-statistic 6.348588 Prob. F(2,25) 0.2359

Obs*R-squared 11.78871 Prob. Chi-Square(2) 0.1828

Test Equation:
Dependent Variable: RESID
Method: ARDL
Date: 10/13/23 Time: 10:29
Sample: 1988 2022
Included observations: 35
Presample missing value lagged residuals set to zero.

Variable Coefficient Std. Error t-Statistic Prob.

LOGEXR(-1) 0.109134 0.085594 1.275015 0.2140

LOGMSS -0.076228 0.060734 -1.255109 0.2210
LOGCOP 0.041478 0.103433 0.401012 0.6918
LOGCOP(-1) 0.013242 0.114126 0.116029 0.9086
LOGINF 0.002343 0.061967 0.037807 0.9701
LOGINF(-1) -0.013212 0.071995 -0.183510 0.8559
LOGINF(-2) 0.019379 0.059622 0.325036 0.7479

62
 C -0.091327 0.321193 -0.284338 0.7785
RESID(-1) -0.730471 0.219065 -3.334494 0.0027
RESID(-2) -0.214838 0.235911 -0.910676 0.3712

R-squared 0.336820 Mean dependent var 3.64E-16

Adjusted R-squared 0.098076 S.D. dependent var 0.152340
S.E. of regression 0.144677 Akaike info criterion -0.793666
Sum squared resid 0.523288 Schwarz criterion -0.349281
Log likelihood 23.88915 Hannan-Quinn criter. -0.640264
F-statistic 1.410797 Durbin-Watson stat 2.007441
Prob(F-statistic) 0.236218

Heteroskedasticity Test: Breusch-Pagan-Godfrey

F-statistic 7.348821 Prob. F(7,27) 0.3421

Obs*R-squared 22.95284 Prob. Chi-Square(7) 0.8717
Scaled explained SS 27.90718 Prob. Chi-Square(7) 0.2152

Test Equation:
Dependent Variable: RESID^2
Method: Least Squares
Date: 10/13/23 Time: 10:34
Sample: 1988 2022
Included observations: 35

Variable Coefficient Std. Error t-Statistic Prob.

C 0.401008 0.063956 6.270088 0.0000

LOGEXR(-1) -0.073599 0.015961 -4.611291 0.4211
LOGMSS 0.050497 0.011389 4.433740 0.4531
LOGCOP 0.017526 0.021625 0.810476 0.4248
LOGCOP(-1) -0.100026 0.023575 -4.242868 0.0002
LOGINF -0.023863 0.011506 -2.074027 0.0477
LOGINF(-1) -0.019318 0.013716 -1.408394 0.1704
LOGINF(-2) -0.016851 0.011771 -1.431626 0.1637

R-squared 0.655796 Mean dependent var 0.022545

Adjusted R-squared 0.566557 S.D. dependent var 0.046238
S.E. of regression 0.030441 Akaike info criterion -3.948412
Sum squared resid 0.025020 Schwarz criterion -3.592904
Log likelihood 77.09722 Hannan-Quinn criter. -3.825691
F-statistic 7.348821 Durbin-Watson stat 1.527176
Prob(F-statistic) 0.000058

Appendix 2: Data

63
 Exchange Rate Crude Oil Price Money Supply
Year (NGN/US$) (US$) (N'Billion) Inflation (%)
1986 2.02 14.4 27.39 23.92
1987 4.02 18.4 33.67 41.83
1988 4.54 15 45.45 54.51
1989 7.39 18.2 47.06 50.47
1990 8.04 23.8 68.66 7.36
1991 9.91 20.1 87.50 13.01
1992 17.30 19.4 129.09 44.59
1993 22.05 17.1 198.48 57.17
1994 21.89 16 266.94 57.03
1995 21.89 17.2 318.76 72.84
1996 21.89 20.8 370.33 29.29
1997 21.89 19.1 429.73 10.67
1998 21.89 12.8 525.64 7.86
1999 92.69 17.9 699.73 6.62
2000 102.11 28.4 1,036.08 6.94
2001 111.94 24.45 1,315.87 18.87
2002 120.97 25.01 1,599.49 12.88
2003 129.36 28.83 1,985.19 14.03
2004 133.50 38.1 2,263.59 15.00
2005 132.15 54.38 2,814.85 17.86
2006 128.65 65.14 4,027.90 8.23
2007 125.83 72.52 6,689.37 5.39
2008 118.57 96.99 9,513.85 11.58
2009 148.88 61.51 10,928.02 12.54
2010 150.30 79.47 11,662.91 13.70
2011 153.86 111.26 14,192.09 10.80
2012 157.50 111.63 18,035.94 12.20
2013 157.31 108.56 20,615.45 8.50
2014 158.55 98.97 20,451.73 8.05
2015 193.28 52.32 21,288.24 9.01
2016 253.49 43.67 28,083.91 15.70
2017 305.79 54.25 28,473.66 16.50
2018 306.08 71.34 32,739.62 12.10
2019 306.92 64.3 34,850.88 11.4
2020 358.81 41.96 38,904.92 13.25
2021 399.96 70.86 43,818.47 16.95
2022 423.72 100.93 41,694.91 18.85

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