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Currency Devaluation and Trade Balance Nexus: A Test of Marshall-Lerner Condition in Nigeria

Olasubomi Are ()
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Olasubomi Are: Small Business & Informal Economic Research Group, Department of Economics, University of Lagos Akoka, Akoka Lagos

BizEcons Quarterly, 2019, vol. 4, 23-43

Abstract: Devaluation on the trade balance in recent times emerged as a vital policy issue in Nigeria due to the recent economic crisis. This paper examines the nexus between devaluation and Nigeria’s trade balance by empirically investigating the Marshall-Lerner condition using annual data covering the period of 1986-2015. It also examines the dynamics of the relation between Nigeria’s trade balance and the real exchange rate. The Engel-Granger OLS-based Cointegration technique and the Error Correction Mechanism (ECM) modelling technique were employed to conduct these analyses. Findings suggest that the Marshall-Lerner condition is not satisfied in Nigeria and that real exchange rate has no significant effect on the trade balance both in the long-run and short-run. Also, findings revealed that income effects dominate price effects on trade in Nigeria.

Keywords: Exchange rate; Currency devaluation; Trade balance (search for similar items in EconPapers)
JEL-codes: B41 C21 F31 (search for similar items in EconPapers)
Date: 2019
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