How different oil shocks drive exchange rate changes? New insights from 11 sub-Saharan African economies

This article investigates the impact of different oil shocks – oil supply shocks, aggregate demand shocks, and oil-specific demand shocks – on the currency fluctuations of 11 sub-Saharan African (SSA) economies. Using the autoregressive distributed lag (ARDL) and nonlinear ARDL (NARDL) models, we examine these shocks’ symmetric and asymmetric effects. The ARDL analysis reveals that demand-driven oil shocks, particularly oil-specific demand shocks, exert a more significant short-term influence on SSA currencies compared to oil supply shocks. However, the lack of cointegration across SSA countries leaves long-term effects uncertain. The NARDL model, which accounts for asymmetry, not only supports the short-term findings but also strengthens evidence of long-term impacts by revealing greater cointegration among SSA currencies. Our results demonstrate that demand shocks, rather than supply shocks, drive currency fluctuations in SSA economies, particularly in the short term. The NARDL model further highlights that asymmetries in oil shocks have a more pronounced influence over the long term than in the short term.