GOMBE JOURNAL OF GENERAL STUDIES Namadina Hamza & Sunday Elijah GJGS 2018 Vol. 2 No. 1 ISSN 2659 1642 Page 200 TESTING ASYMMETRIC EFFECT OF OIL PRICE ON EXCHANGE RATE IN NIGERIA: NEW EVIDENCE FROM NONLINEAR ARDL APPROACH 1 Namadina Hamza and 2 Sunday Elijah 1 Department of Economics, Federal University Gusau, Zamfara State, Nigeria hamzanamadi60@gmail.com 2 Department of Economics, Federal University Gusau, Zamfara State, Nigeria elijahsundayecons@gmail.com ABSTRACT This study examined the existence of asymmetry relationship between oil price and exchange rate in Nigeria during the period 2008:1-2017:12. The study applied unit root test to ensure that none of the variables is integrated of order I (2) and nonlinear autoregressive distributed lags (NARDL) model, respectively. The results revealed that all the variables are stationary at their first difference and that there exist cointegrating relationship between oil price increase, oil price reduction and exchange rate in the study period. Similarly, the findings from the study indicate that oil price reduction has a significant negative impact on the exchange rate. However, the increase in oil price has a negative but not significant effect on exchange rate in the long run, thereby confirming the existence of asymmetric relationship between oil price increase and decrease on the exchange rate. The estimated model on the basis of diagnostic tests is found to be adequate and stable from the CUSUM stability test. The paper therefore recommends that the monetary authorities should adopt other policy measures to guard against the negative effect of oil price decrease on the values of Nigeria’s currency (Naira) Key words: Asymmetry, Exchange Rate, Nonlinear ARDL, Oil Price INTRODUCTION Oil is an important source of energy for the global economy. With the increasing energy demand, countries are becoming more and more dependent on oil, and the oil price fluctuations following this dependency may affect countries’ economies (Delavari, Alikhani & Esmaeil, 2013). In this regard, the oil price fluctuations have a diverse effect on oil exporting and importing countries. Specifically, it will affect manufacturing costs and inflation rate of oil importing countries and vice versa. Similarly, rising oil prices leads to not only transfer of income from oil importing to oil exporting countries but also affects exchange rate (Amano & Norden, 1998; Turhan, Hacihasanoğlu & Soytas, 2012). As for oil exporting countries, decreasing oil prices will decrease export revenue (the opposite applies for increasing prices), decreasing oil prices pressure on balance of payments, affect economic growth negatively. While public expenditures decrease with the decline in income, interest rates will raise in financial markets which will have liquidity problems (Rickne, 2009). Nigeria has been an oil producing country which source more than 85 percent of its revenue from sale of crude oil. The shock in the price of oil may likely exert some influence on macroeconomic activity particularly exchange rate. For instance, an appreciation of real exchange rate creates a problem in the country’s balance of payments because it results to overvaluation which makes imports cheaper and exports dearer thereby reducing the competitiveness of a country and Nigeria been import dependent country may have its competitiveness reduce in the international market. Considering the importance of oil on exchange rate financial economists were prompted to undertake a number of researches to examine the relationship between oil price and exchange rates such as (Ahmad(2004); Osuji, 2015; Amano, 1998; Beckman & Czudaj, 2016; and Basher, Haug &