Exchange Rate Volatility Effect on Trade Variations in Nigeria

Abstract

The paper, investigates the hypothesis that exchange rate risk affect international trade. Theoretically and empirically, the results are mix and inconclusive. Our data set that are annual in nature cover the period 1970–2010., were subjected to unit root and cointegration tests Empirical results showed that all variables I(I),except import that is I(0) and are significant at 1,5, and 10 percent.. cointegration results revealed that a stable long run equilibrium relationship exists between the variables. Employing error correction modelling, we estimate the equation using ordinary least squares (OLS). The result revealed that exchange rate volatility is insignificant in explaining variations in imports but significant and positive with respect to export. Also, the result showed that exports have positive and significant impact on imports implying that ability to export is hinged importations. This prompted a causality test that rejected the null hypothesis. The study recommends exchange rate and trade policies that will promote greater exchange rate stability and trade conditions that will promote domestic production in the economy. This we believe will enhance non oil exports and reduce importation. To achieve this, government should deliver efficient infrastructural services, especially power supply and other energy resources.

DOI: 10.5901/mjss.2013.v4n6p401