A Revisit of Exchange Rate Volatility and Trade Flow in Nigeria

Abstract

Since the advent of floating exchange rates in Nigeria, exchange rate has been highly volatile. Excessive volatility has severe implications for international trade. This study revisits the long- standing debates on the link between exchange rate volatility and trade flow for the Nigerian economy, 1980-2020. We employ the Granger causality tests based on VECM\VAR model. The results show evidence for a bi-directional causality from trade to exchange rate volatility and vice versa. Since the Nigeria seeks export promotion, there is need to undertake measures that will check excessive fluctuations beyond fundamentals needed for the economy. Hence, we suggest that monetary authority should continue its periodic exchange rate intervention to curtail excessive swings. This should be carefully done to maintain policy rate that will not be counter-productive.

Keywords

• exchange rate volatility
• trade flow
• var
• granger causality