Impact of Real Exchange Rate on Trade Balance in Nigeria

Abstract The study investigated whether the depreciation of exchange rate has a favourable impact on trade balance in Nigeria, based on the Marshall–Lerner (ML) condition. The Johansen method of cointegration and vector error correction methodology (VECM) was employed to investigate the existence of a long‐run relationship between trade balance and the specified set of independent variables. The results confirm the satisfaction of the Marshall–Lerner condition in Nigeria, implying that depreciation of the exchange rate has a positive effect on trade balance in the long run. The study also established that a one per cent depreciation in the exchange rate would improve trade balance by 1.16 per cent. In the light of these findings, the study recommends a gradual depreciation of the exchange rate, which should be accompanied with export policy that encourages domestic production of non‐oil products for exports.