Exchange Rate Volatility and International Trade In Nigeria

Abstract

Volatile exchange rate makes international trade and investment decisions more difficult because volatility increases exchange rate risk. This study seeks to evaluate the impact of exchange rate volatility on international trade in Nigeria on the basis of annual data from 1980 to 2013, which was obtained from World Bank Development Indicators (WDI). Exchange rate volatility, gross national product (GDP), investment, interest rate, import and export were used to capture the causal relationship between exchange rate volatility and international trade and also the long-run and short-run relationship between exchange rate volatility and international trade. A review of the literature reveals that exchange rate volatility has a negative impact on international trade. The empirical analysis began with testing for stationarity of the variables by applying the Augmented Dickey-Fuller (ADF), this was followed by co-integration test, then the granger causality and the Error Correction Model (ECM). The co-integration test indicated that the variables are co-integrated which implies that a long-run relationship exist between the variables while the granger causality test showed that a causal relationship exist between international trade and exchange rate volatility. It was observed form the ECM analysis that exchange rate volatility negatively affects international trade. The study therefore recommend that the government should put in place exchange rate and trade policies that will promote greater exchange rate stability and trade conditions that will promote domestic production in the economy. In other to achieve this, the government should provide efficient infrastructural services like energy resources.