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Exchange rate volatility and export trade in Nigeria: an empirical investigation

Shehu Aliyu

Applied Financial Economics, 2010, vol. 20, issue 13, 1071-1084

Abstract: This article seeks to quantitatively assess the impact of exchange rate volatility on nonoil export flows in Nigeria. Theoretically, volatility-trade link is ambiguous, although a strand of studies reported inverse link between export flow and volatility. This article employed fundamental analysis where the flow of nonoil exports from the Nigerian economy is assumed to be predicated on fundamental variables: the naira exchange rate volatility, the US dollar volatility, Nigeria's Terms of Trade (TOT) and Index of Openness (OPN). Empirical results showed the presence of unit root at level; however, the null hypothesis of nonstationarity was rejected at first difference. Cointegration results revealed that a stable long-run equilibrium relationship exists between nonoil exports and the fundamental variables. Using quarterly observations for 20 years, vector cointegration estimate revealed that the naira exchange rate volatility decreased nonoil exports by 3.65%, while the same estimate for the US dollar volatility increased export of nonoil in Nigeria by 5.2% in the year 2003. This article recommends the measures that would promote greater openness of the economy and exchange rate stability in the economy.

Date: 2010
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DOI: 10.1080/09603101003724380

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