Exchange Rate Fluctuations And Trade Flows In Nigeria: A Time Series Econometric Model

Consequent upon the collapse of the Bretton Woods system and the resultant adoption of the flexible exchange rate system in 1973, economists and policy-makers have been concerned about the significant effects of exchange rate fluctuations on the economy in general and trade, in particular. However, theoretical and empirical works on the subject have produced mixed results. This study investigates exchange rate fluctuations and trade flows in Nigeria:

A time-series econometric model for the period 1980:1 to 2008:4, using GARCH modelling, Mundell-Fleming model, multivariate Johansen cointegration test, vector error-correction mechanism, and complemented by variance decomposition and impulse response analyses. Empirically, interesting results were found. Exchange rate fluctuations are found to have a negative and significant effect on Nigeria’s trade with the US. Different policy changes in the economy are found to have great influence on the fluctuations of exchange rate, which directly or indirectly affect trade flows negatively. In line with theoretical expectation, US GDP exerts a significant positive effect on Nigeria’s trade but curiously, domestic income exerts a significant negative effect on trade.

The study also revealed that real exchange rate may lead to an increase in the volume of net exports. Hence, policy-makers seeking export promotion (import prohibition) strategies can use the real exchange rate as a means of boosting trade. However, any exchange rate policy in the country that aims to encourage trade regardless of its fluctuations is likely to be counterproductive. It is instructive therefore, for policymakers to work towards increasing Nigeria’s trade while ensuring a stable exchange rate that will equally not stabilize poverty.