Are Exchange Rates in Nigeria Useful in Predicting Global Commodity Prices?

Abstract

In this paper, we explore granger causality between the global commodity prices and exchange rate of Nigerian ‘Naira’. The analysis through the use of Vector Error Correction (VEC) Granger Causality/Block Exogeneity Wald Test shows that the long run pattern of crude oil prices at the international market could be largely predicted given the basic information on real exchange rate of Naira. The same applies to the long-run predictability of the real exchange rate given basic information on the price of crude oil. Meanwhile, the information on the nominal exchange rate of Naira could only assist in the short-run prediction of the global prices of crude oil and other commodity prices. Consequently, given that Nigeria, like many other countries do not have control over world commodity prices, since they are determined competitively, the outcome of this analysis will enable policy makers to adapt domestic policies to curtail adverse consequences of unexpected movement in world commodity prices. It is especially useful in predicting the volatile crude oil price which is the economic nerve of Nigeria economy, based on the prior information from domestic real exchange rates.