Exchange Rate Volatility and Export Trade in Nigeria: An Empirical Investigation

Aliyu, Shehu Usman Rano (2008): Exchange Rate Volatility and Export Trade in Nigeria: An Empirical Investigation.

Abstract

The paper seeks to quantitatively assess the impact of exchange rate volatility on non oil export flows in Nigeria. Theoretically, volatility-trade link is ambiguous, although a strand of studies reported inverse link between export flow and volatility. The paper employed fundamental analysis where the flow of non oil 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 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 non oil exports and the fundamental variables. Using quarterly observations for twenty years, vector cointegration estimate revealed that the naira exchange rate volatility decreased non oil exports by 3.65% while the same estimate for the US dollar volatility increased export of non oil in Nigeria by 5.2% in the year 2003. The paper recommends measures that would promote greater openness of the economy and exchange rate stability in the economy.

• Item Type: MPRA Paper
• Language: English
• Keywords: exchange rate volatility, non oil exports, terms of trade, index of openness, unit root and cointegration analysis
• Subjects: F - International Economics > F1 - Trade > F10 - General; F - International Economics > F1 - Trade > F17 - Trade Forecasting and Simulation

References

Abrams, R. K. (1980) “Actual and Potential Trade Flows with Flexible Exchange Rates”, Federal Reserve Bank of Kansas City Working Paper, 80 – 01.

Agu, C. (2002) Real Exchange Rate Distortions and External Balance Position of Nigeria: Issues and Policy Options, Journal of African Finance and Economic Development, Instituteof African-American Affairs, New York University, New York.

Akanji, B. (1992), “The Changes in the Structure of Export Crops and Food Crop Production under the Structural Adjustment Program: The case of Cocoa and Yam,” NISER Monograph Series.

Aliyu, S. U. R. (1994), “Critique of Vent for Surplus Thesis and the Development of Cash Crops in Nigeria under the Structural Adjustment Programme, Unpublished M.Sc. Thesis,University of Ibadan.

___________. (2001) ‘Trade Liberalization and Economic Growth in Nigeria: 1970 – 1998’Unpublished PhD. Thesis, Faculty of Social and Management Sciences, Bayero University Kano; Nigeria.

____________. (2007a) “Bilateral Trade Talk between Nigeria and India: A Recipe”, Being a Paper submitted for publication in the Proceedings of a Round Table Discussion on Nigeria-India Bilateral Talk.

____________. (2007b) “Import-Export Demand Functions and Balance of Payments Stability in Nigeria: A Co-integration and Error Correction Modeling, Submitted to Journal of Social and Management Sciences (JOSAMS).

Anderton, R. and F. Skudelny, (2001) “Exchange Rate Volatility and Euro Area Imports” European Central Bank (ECB) Working Paper, no. 64.

Arize, Augustine C. (1998a) “The Effects of Exchange Rate Volatility on U.S. Imports: An Empirical Investigation” International Economic Journal, 12(3): pp. 31- 40.

Arize, Augustine C. (1998b) “The Long run Relationship between Imports Flows and Real Exchange Rate Volatility: The Experience of Eight European Economies”, International Review of Economics and Finance, 7(4), pp. 417 – 435. 20

Baffes, J., I. Elbadawi, and S. O'Connell. (1999) "Single-Equation Estimation of the Equilibrium Real Exchange Rate." World Bank, Policy Research Department, Washington, DC.

Baldwin, R., F. Skudelny and D. Taglioni (2005) “Trade Effect of the Euro: Evidence from Sectoral Data, European Central Bank Working Paper Series, (February) No. 446.

Baron, D. P. (1976) “Flexible Exchange Rate, Forward Markets and the Level of Trade”, American Economic Review, 66: 253 – 66.

Baum, C. F., M. Caglayan, and N. Ozkan (2004), “Nonlinear Effects of Exchange Rate Volatility on the Volume of Bilateral Exports“, Journal of Applied Econometrics Vol. 19, pp. 1-23.

Belanger, D and S. Gutierrez (1998) “Impact de la variabilite des taux de change sur le commerce international: un survol critique de la literature”, L’Actualite economique, 66(1): 65 – 83.

Brada, J. C. and J. A. Mendez (1988) “ Exchange Rate Risk, Exchange Rate Regime and the Volume of International Trdae”, Kylos, 41: 263 – 280.

Bini-Smaghi, L. (1991) Exchange Rate Volatility and Trade: Why it is so Difficult to find any Empirical Relationship? Applied Economics 23, pp. 927-936.

Caporale, Tony and Khoswrow Doroodian (1994) “Exchange Rate Variability and the Flow of International Trade”, Economics Letters, 46: 49 – 54.

CBN (2007a) “Brief on the Determination of the Optimum Exchange Rate Band Under the IFEM, External Sector Division of the Research Department, Central Bank of Nigeria.

CBN (2007b) “The Extent of Naira Exchange Rate Misalignment”, Research and Statistics Department, Central Bank of Nigeria, October.

CBN (2008) “The Changing Structure of the Nigerian Economy and Implications for Development”, Revised edition, Research Department, Central bank of Nigeria, (forthcoming).

Cerra, V. and S. Saxena. (2002) “What Caused the 1991 Currency Crisis in India?” IMF Staff Papers, 49 (3). Chang Fuzhi and Orden David (2005) “Exchange Misalignment and its Effects on Agricultural Producer Support Estimate: Empirical Evidence from India and China” International Food Policy Research Institute (IFPRI), MTID Discussion Paper, No. 81. Washington DC.

Clark, P. and R. MacDonald. 1999“Exchange Rates and Economic Fundamentals: a Methodological Comparison of BEERS and FEERS.” in R. MacDonald and J. Stein (eds.) Equilibrium Exchange Rates, Kluwer Academic Publishers, Boston.

Cooper, Richard N. (1971) “Currency Devaluation in Developing Countries,” Essay in International Finance, No. 86, International Finance Section, Princeton University.

Corrinne Ho and Robert N McCauley (2003) Living with Flexible Exchange Rates: Issues and Recent Experience in Inflation Targeting Emerging Market Economies, Monetary and Economic Department, BIS Working Papers, No 130

Cote, A. (1994) "Exchange Rate Volatility and Trade", Bank of Canada Working Paper, 94-5 Cottani, J., D. Cavallo and M. S. Khan (1990) “Real Exchange Rate Behavior and Economic Performance in LDCs, Economic Development and Cultural Change, vol.39., pp. 61-76.

De Grauwe, P. (1987) International Trade and Economic Growth in the EMS”, European Economic Review, 31(1/2): 389 – 98.

De Grauwe, P. (1988) “Exchange Rate Variability and the Slowdown in Growth of International Trade.” IMF Staff Papers.

Dell’Ariccia, G. (1998) Exchange Rate Fluctuations and Trade Flows: Evidence from the European Union. IMF Working Paper, WP/98/107.

Diaz-Alejandro, C.F. (1984) “Exchange Rates and Terms of Trade in the Argentine Republic: 1973-76.” In Trade Stability, Technology and Equity in Latin America eds. by IVI. Syrquin and S. Teitel, (New York: Academic Press).

Dibooglu, S., and W. Enders, 1995, “Multiple Cointegrating Vectors and Structural Economic Models: An Application to the French Franc/U.S. Dollar Exchange Rate,” Southern Economic Journal, Vol. 61 (April), pp. 1098–1116.

Dixit, A. (1989) Hysteresis, Import Penetration, and Exchange Rate Pass-Through. Quarterly Journal of Economics, Vol. CIV, No.2 (May) 205-227.

Dornbush, R. and Frankel, J. (1988) “The Flexible Exchange Rate System: Experience and Alternatives” in S. Bornereditions (ed.) International Finance and Trade, International Economic Association and MacMillan Press, London.

Dornbusch, R. (1987) “Exchange Rates and Prices,” American Economic Review, Vol. 77 (March), pp. 93–106.

Dufrenot, G and E. B. Yehoue, (2005) Real Exchange Rate Misalignment: A Panel Cointegration and Common Factor Analysis, IMF Working Paper, WP/05/164.

Edwards, Sebastian, (1986) “Are Devaluation Contractionary?” The Review of Economics and Statistics, (August).

Edwards, Sebastian, (1988) Exchange Rate Misalignment in Developing Countries, The John Hopkins University Press, Baltimore, MD.

Edwards, Sebastian, (1989) Real Exchange Rates, Devaluation and Adjustment: Exchange Rate Policy in Developing Countries, MIT Press, Cambridge, Massachusetts.

Eichengreen, B. and D. A. Irwin (1995) “Trade Blocs, Currency Blocs and the Reorientation of Trade in the 1930s”, Journal of International Economics, 38: 1 – 24.

Egwaikhide, F. O. (1999) ‘Determinants of Imports in Nigeria: A dynamic Specification’ African Economic Research Consortium, (AERC) Research Paper, No. 91.

Engle, Robert F. and C. W. J. Granger (1987). “Co-integration and Error Correction: Representation, Estimation, and Testing,” Econometrica, 55, 251–276.

Engle, Robert F. and K. F. Kroner (1995). “Multivariate Simultaneous Generalized ARCH,” Econometric Theory, 11, 122-150.

Ethier, Wilfred (1973) “International Trade and the Forward Exchange Market”, American Economic Review, 63: 494 – 503.

European Commission, (1995) The Impact of Exchange Rate Movements on Trade within the Single Market. European Economy no. 4

Flam, H. and Jansson P. (2000) EMU Effects on International Trade and Investment, Stockholm University, seminar paper no.683

Fountas, S. and K. Aristotelous (1999) “Has the European Monetary System led to more Exports? Evidence from four European Union Countries”, Economic Letters, 62: 357 – 63.

Franke, G. (1991) “Exchange Rate Volatility and International Trading Strategy” Journal of International Money and Finance 10: 292-307

Frankel, J. and Rose, A. (2002) An Estimate of the Effect of Currency Unions on Trade and Output. Quarterly Journal of Economics, forthcoming.

Frankel, J. and Wei, S. (1993) Trade Blocs and Currency Blocs. NBER Working Paper No.4335.

Gala Paulo and Claudio R. Lucinda (2006) Exchange Rate Misalignment and Growth: Old and New Econometric Evidence, Journal of Economic Literature.

Ghura, D. and T. J. Greenes (1993) “The Rea Exchange Rate and Macroeconomic Performance in Sub-Saharan Africa,” Journal of Development Economics. 42: 155 – 174.

Glick, R and A. K.Rose, (2002) “Does a Currency Union Affect Trade? The Time Series Evidence” European Economic Review 46(6), 1125-1151.

Gujarati, Damodar N. (2003) Basic Econometrics, 4th Edition, New York: McGraw-Hill.

Hodrick, R. J. and E. C. Prescott (1997). “Postwar U.S. Business Cycles: An Empirical Investigation,” Journal of Money, Credit, and Banking, 29, 1–16.

Hooper, P. & S. Kohlhagen, (1978) The Effect of Exchange Rate Uncertainty on the Prices and Volumes of International Trade. Journal of International Trade 8, pp 483-511

Hirschman, Albert. O. (1949) Devaluation and the Trade Balance: A Note, Review of Economics and Statistics, Vol. 31, pp. 50 -53.

Ihimodu, I. I. (1993) “The Structural Adjustment Programme and the Nigeria’s Agricultural Development”, Monograph Series, No. 2, National Centre for Economic Management and Administration (NCEMA), Ibadan, Nigeria.

Ilimi, Atsushi (2006) Exchange Rate Misalignment: An Application of the Behavioral Equilibrium Exchange Rate (BEER) to Botswana, International Monetary Fund, WP/06/140

IMF, (1984) Exchange Rate Volatility and World Trade. IMF Occasional Paper 28

IMF (2005) IMF Executive Board Discusses “Fixed to Float: Operational Aspects of Moving towards Exchange Rate Flexibility”, IMF Public Information Notice No.04/141.

Johansen, Soren and Katarina Juselius (1990) “Maximum Likelihood Estimation and Inferences on Cointegration—with applications to the demand for money,” Oxford Bulletin of Economics and Statistics, 52, 169–210.

______________________________, (1992) “Testing Structural Hypotheses in a Multivariate Cointegration Analysis of the PPP and the UIP for UK,” Journal of Econometrics, Vol. 53 (July/September), pp. 211–44.

Johansen, Soren (1991). “Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models,” Econometrica, 59, 1551–1580.

Johansen, Soren (1995) “Likelihood-based Inference in Cointegrated Vector Autoregressive Models”, Oxford: Oxford University Press.

Kandil and Ida Mirzaie (2002) “Exchange Fluctuations and Disaggregated Economic Activity in the US: Theory and Evidence”, Journal of International Money and Finance, No. 1 (February) pp. 1 – 31.

Khan, M. S. (1974) ‘Imports and Exports Demand in Developing Countries’, IMF Staff Working Papers, Vol. 21, No. 3.

Kenen, P.B. and Rodrik, D. (1986) Measuring and Analyzing the Effects of Short-Term Volatility in Real Exchange Rates. Review of Economics and Statistics 68(2), May 1986.

Klaassen, F. (2004) “Why is it so Difficult to Find an Effect of Exchange Rate Risk on Trade?” Journal of International Money and Finance, 23, pp. 817-839.

Koray, F. and Lastrapes, W. (1989) Real Exchange Rate Volatility and US Bilateral Trade: a VAR Approach, The Review of Economics and Statistics 71, pp. 708-712.

Kroner, K. F. and W. D. Lastrapes, (1991) “Impact of Exchange Rate Volatility on International Trade: Reduced Form Estimates Using the GARCH-in-Mean Model”, Manuscript, University of Arizona.

Krugman, Paul, R., and Lance Taylor (1978) “Contractionary Effects of Devaluation,” Journal of International Economics, No. 8, (August) pp. 445 – 456.

Kwiatkowski, Denis, Peter C. B. Phillips, Peter Schmidt & Yongcheol Shin (1992) “Testing the Null Hypothesis of Stationary against the Alternative of a Unit Root,” Journal of Econometrics, 54, 159-178.

Lastrapes, W. & Koray, F., 1990. Exchange Rate Volatility and US Multilateral Trade Flows Journal of Macroeconomics 12, pp. 341-363.

MacDonald, R., and J. Nagayasu (1998) “On the Japanese Yen-U.S. Dollar Exchange Rate: A Structural Econometric Model Based on Real Interest Differentials,” Journal of the Japanese and International Economies, Vol. 12 (March), pp. 75–102.

MacKinnon, James G. (1991). “Critical Values for Cointegration Tests,” Chapter 13 in R. F. Engle and C. W. J. Granger (eds.), Long-run Economic Relationships: Readings in Cointegration, Oxford: Oxford University Press.

MacKinnon, James G. (1996). “Numerical Distribution Functions for Unit Root and Cointegration Tests,” Journal of Applied Econometrics, 11, 601-618.

MacKinnon, James G., Alfred A. Haug, and Leo Michelis (1999), “Numerical Distribution Functions of Likelihood Ratio Tests For Cointegration,” Journal of Applied Econometrics, 14, 563-577.

Mathisen, J. (2003) “Estimation of the Equilibrium Real Exchange Rate for Malawi.” IMF Working Paper, WP/03/104. Meade, James E., (1951) The Theory of International Economic Policy, I: The Balance of Payment, Oxford University Press, Oxford.

McKenzie, M. (1997) “The Impact of ERV on Australian Trade Flows” Journal of International Financial Markets, Institutions and Money, 8:21-38.

McKenzie, M. (1999) “The Impact of Exchange Rate Volatility on International Trade Flows”, Journal of Economic Surveys, 13(1): 71-106.

Meese, R., Rogoff, K. (1983) Empirical Exchange Rate Models of the Seventies: Do they Fit out of Sample? Journal of International Economics 14, 3–24.

Nnanna, O. J. (2002) Monetary Policy and Exchange Rate Stability in Nigeria, Central Bank of Nigeria’s Economic and Financial Review, Vol. 40, Number 3. pp. 1 - 22

Obaseki, P. J. (2001) “The Purchasing Power Parity (PPP) Measure of Naira’s Equilibrium Exchange Rate”, CBN Economic and Financial Review, Vol. 36, No. 1. Pp 1 – 21.

Ojo, O. et al., (1978) “A Quarterly Econometric Model of the Nigerian Economy: Some Preliminary Estimates” Ife Social Science Review 1(2) 149 – 165.

Omolola, A. (1992) “Rubber and Fisheries Industries under the Structural Adjustment Programme,” NISER Monograph Series, No. 2.

Omotosho, B. S. and M. U. Wambai (2005) “Is the Naira Misaligned? Central Bank of Nigeria

Osagie, E. (1985), “Encouraging Production in an Abnormal Economy,” in Ige & Onah (eds.), Production Problems in the Nigerian Economy, Uni. Jos.

Osuntogun, A., C. C. Edordu and B. O. Oramah, (1993) “Promoting Nigeria’s Non-Oil Exports: An Analysis of Some Strategic Issues”, Final Report, African Economic Research Consortium (AERC), Nairobi, Kenya.

Oyejide, T. A. (1986) “The Effects of Trade and Exchange Rate Policies on Agriculture in Nigeria”, Research Report 55, International Food Policy Research Institute, Washington D.C.

Phillips, P.C.B. and P. Perron (1988). “Testing for a Unit Root in Time Series Regression,” Biometrika, 75, 335–346.

Pugh, G., Tyrrall, D. and Tarnawa, L. (1999) Exchange Rate Variability, International Trade and the Single Currency Debate: a Survey. Meeusen (ed.) Economic Policy in the European Union: Current Perspectives (Cheltenham, UK: Edward Elgar).

Rodrik, Dani (1994) “King Kong Meets Godzilla: The World Bank and the East Asian Miracle,” in Albert Fishlow, Catherine Gwin, Stephan Haggard, Dani Rodrik and Robert Wade, eds., Miracle or Design? Lessons from East Asian Experience, Washington, DC, Overseas Development Council, 15 – 53.

Rogoff, K. (1996) “The Purchasing Power Parity Puzzle”, Journal of Economic Literature 34(2), pp. 647 - 668.

Rose, A. (1999) “One Money, One Market: Estimating the Effect of Common Currencies on Trade”. NBER Working Paper Series, 7432.

Rose, A. (2000) “One Money, One Market: The Effect of Common Currencies on Trade”. Economic Policy (30), April 2000, pages 7-33.

Rose, A. K. and C. Engel (2002) “Currency Unions and International Integration”, Journal of Money, Credit and Banking, forthcoming.

Shatz, H. and D. G. Tarr (2001) “Exchange Rate Overvaluation and Trade Protection: Lessons from Experience”, in Drabek, Z. (Ed), Globalization under Threat: The Stability of Trade Policy and Multilateral Agreement, Edgar Elgar: Cheltenham, UK.

Sapir, A., K. Sekkat and A. Weber, (1994), “The Impact of Exchange-Rate Fluctuations on European Union Trade”, CEPR Discussion Paper, 1041, November.

Savvides, A. (1992) “Unanticipated Exchange Rate Variability and the Growth of International Trade”, Welwirtshafliches Archiv, 128: (3) 446 – 63.

Skudelny, F. (2002) Exchange Rate Uncertainty and Trade: a Survey, in: Essays on the Economic Consequences of the European Monetary Union, Chapter 1, Proefschrift voorgedragen tot hetbehalen van de graad van Doctor in de Economische Wetenschappen, Katholieke Universiteit Leuven

Soludo, C. C. and Adeola, F. Adenikinju (1997) “Exchange Rate Misalignment and Investment in Nigeria” Paper Presented to OECD Development Centre, Paris.

Taglioni, D. (2002) Exchange rate volatility as a barrier to trade: new methodologies and recent evidence, Économie Internationale 89-90 (2001-2002)

Thursby, J. G. and M. C. Thursby, (1987) “Bilateral Trade Flows, the Linder Hypothesis and Exchange Rate Risk”, Review of Economics and Statistics, 69: 488 – 495.

Viaene, J. M. and C. G. de Vries (1992) “International Trade and Exchange Rate Volatility”, European Economic Review, 36: 1311 – 21.

Wickens, M. (1996) “Interpreting Cointegrating Vectors and Common Stochastic Trends,” Journal of Econometrics, Vol. 74 (October), pp. 255–71.

Williamson, J. (1994) “Estimates of FEERs,” in Estimating Equilibrium Exchange Rates, ed. by J. Williamson (Washington: Institute for International Economics). World Bank (1984) Toward Sustained Development in Sub-Saharan Africa. Washington DC: The World Bank.

World Bank, (1994), “Nigerian Structural Adjustment Programme: Policies, Implementation and Impact,” May.

Yotopoulos A. Pan (1996) Exchange Rate Parity for Trade and Development: Theory, Test and Case Studies. Cambridge University Press.

Yotopoulos A. Pan and Sawada Yasuyuki (2005) “Exchange Rate Misalignment: A New Test of Lung-Run PPP Based on Cross-Country Data”, CIRJE Discussion Paper, February.

Zubair, M. A. & M. I. Jega (2008) “Islamic Dinar as a Unit of Account of IDB: Implications for Competitiveness and Operational Efficiency”, Discussion Paper, Economic Policy and Statistics Department, Islamic Development Bank, Jeddah, Saudi Arabia.