Bilateral Real Exchange Rate Volatility and Trade: The Nigerian Case

Real exchange rate volatility can inhibit or enhance trade.  In Nigeria, real exchange rate volatility of naira with respect to currencies of major trading partners such as China, Japan, UK and US exist but not similar. This situation will have important consequence on trade flows between Nigeria and each of these trading partners. This study therefore unravels the nature and effect of real exchange rate volatility on trade at bilateral level over the period 2008:M1 to 2019:M3.  Results obtained from the ARDL model in the context of risk aversion theory are as follow: (1) In the short run, real exchange rate volatility differs across country partners but more persistent in the case of Nigeria-UK trade; (2) in the long run, naira-dollar exchange rate shows detrimental effect on exports to the US, albeit insignificant; (3) real exchange rate volatility is trade enhancing with Japan, inhibiting with the UK and indifference with China and US.  The implication of these results is that issues surrounding real exchange rate volatility and trade is better studied at the bilateral level in order to provide easy and implementable policy recommendations.  Going by the results, it is recommended that trade with Japan should be strengthened.  The monetary authorities should also consider Yen and Yuan as part of foreign currencies for international transaction.  More hedging instruments should be encouraged to absorb volatility, particularly in the case of Nigeria-UK trade.  The potential traders will possibly do well by looking inwards instead of facing exchange rate risk in the UK.