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EFFECT OF EXCHANGE RATE ON TRADE FLOWS: EVIDENCE FROM NIGERIAN ECONOMY
Abstract
The aim of this paper is to investigate the effect of exchange rate dynamics on the trade flows in the Nigerian economy with a monthly set of data that ranges from year 2000 to year 2020. Ordinary least squares and Error correction mechanism estimate was adapted to achieved the objective of the study. Balance of trade (BOT) was used as a proxy to capture trade flows in the Nigerian economy. Variables of the model were subjected to Unit Root test and were found to be integrated of order one and zero. In that case, ARDL Bound test of Cointegration shows the existence of long run dynamics between exchange rate and balance of trade. Result from the study shows that exchange rate is positive and is highly significant to explain changes in the balance of trade in the Nigerian economy. In light of these findings, the study recommends that stability of exchange rate should be encouraged to accommodate external shocks while encouraging trade with the outside world and economic growth in Nigeria.
Keywords: Exchange rate, Nigerian economy, Ordinary Least Squares, Trade