Exchange Rate Behaviour and Trade Balances in Nigeria: An Empirical Investigation

The study estimated the effect of exchange rate on the balance of trade of Nigeria for the period 1970-2012 using annual data. There is considerable disagreement in the literature on the effect of exchange rate behavior on trade balances and the effectiveness of currency devaluation as a tool for increasing a country’s balance of trade. We used the real exchange rate for the analysis applying the Augmented Dickey Fuller test for unit root, Johansen test for co-integration among variables, error correction mechanism (ECM) to investigate the linkage of these variables. The co-integration test confirms that there is a long run relationship between trade balances and the variables of interest. The estimated result shows that the exchange rate has a significant negative influence on trade balance in Nigeria during the period. The result therefore suggested that devaluation of the domestic currency does not lead to improvement in the balance of trade and hence balance of payments position of the country. It was therefore recommended that measures to stabilize exchange rate and check its continuous free fall should be carefully considered as a policy option