Bilateral Real Exchange Rate Volatility and Trade: The Nigerian Case

Document Type : Research Paper

Authors

Department of Economics, Federal University of Agriculture, Abeokuta, Nigeria

10.22059/ier.2024.349723.1007557

Abstract

Real exchange rate volatility can inhibit or enhance trade. The volatility of Nigerian currency concerning Yuan, Yen, Pounds, and the US dollar exists but is not homogenous. This situation will affect trade flows between Nigeria and China, Japan, the UK, and the US. Therefore, this study unravels the nature and possible result of real exchange rate volatility on trade at the bilateral level from 2008:M1 to 2019:M3. Results obtained from the ARDL model in the context of risk aversion theory are as follows: (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. Following these results, issues surrounding real exchange rate volatility and trade must be better studied at the bilateral level 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 transactions. 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 inward instead of facing exchange rate risk in the UK.

Keywords

Main Subjects

References

Aderemi, T., Ogunleye, A., Abalaba, B., & Owolabi, O. (2020). Exchange Rate Volatility and Trade Balance in Nigeria: an ARDL Approach. Euroeconomica, 39(1), 7-17.
Akpokodje, G., & Omojimmer, B. (2009). The Effect of Exchange Rate Volatility on the Imports of EC. Social Science, 4(2), 304-346.
Aliyu, S. (2010). Exchange Rate Volatility and Export Trade in Nigeria: An Empirical Investigation. Applied Financial Economics, 20(13), 1071-1084.
Arize, A., Osang, T., & Slotje, S. (2007). Exchange Rate Volatility and Foreign Trade: Evidence from Thirteen-LDCs. Journal of Business and Economic Statistics, 18(1), 10-17.
Asterious, D., Masatci, K., & Pilbeam, B. (2016). Exchange Rate Volatility and International Trade: International Evidence from the MINT Countries. Economic Modelling, 58, 133-148.
Bahmani-Oskooee, M., & Gelan, A. (2018). Exchange Rate Volatility and International Trade Performance: Evidence from 12 African Countries. Economic Analysis and Policy, 58, 14-20.
Bahmani-Oskooee, M., & Aftab, A. (2017). On the Asymmetric Effect of Exchange Rate Volatility on Trade Flows: New Evidence from US-Malyaysia Trade at the Industry-Level. Economic Modelling, 63, 86-103.
Bahmani-Oskooee, N., & Nouira, R. (2019). On the Impact of Exchange Rate Volatility on Tunisian Trade with 16 Partners: An Asymmetry Analysis.  Economic Change and Restructuring, 53(3), 357-378.
Bao-Rabio, O., Berke, B., & McMillan, D. (2020). Exchange Rate Volatility in Eurozone.  Econometrics, 14(5), 1-25.
Calderon, C., Chong, A., & Stein. E. (2007). Trade Intensity and Business Cycle Synchronization; Are Developing Countries Any Difference? Journal of international Economics, 71(1), 2-21.
Chi, J., & Cheng, S. (2016). Do Exchange Rate Volatility and Income Affect Australia’s Merchandize Exports Flows to Asia? Transport Policy, 47, 13-21.
Clark, P. (1973). Uncertainty, Exchange Rate, and The Level of International Trade. Western Economic Journal, 11(3), 302-313.
Clark, P., Tamirisa, N., Wei, S., Sadikov, A., & Rajan, R (2004). Exchange Rate Volatility and Trade Flows: Some New Evidence. IMF Occasional Paper, 235, 1-70.
Dada, J. (2021). Asymmetric Effect of Exchange Rate Volatility on Trade in SSA Countries. Journal of Economic Administrative Sciences, 37(2), 149-162.
Devita, G., & Abbort, A. (2004). The Impact of Exchange Rate Volatility on UK Export to EU Countries. Scottish Journal of Political Economy, 51(1), 62-86.
Ekanayake, E., & Dissanayake, A. (2021). Effects of Real Exchange Rate volatility on Trade: Empirical Analysis of the US Exports to BRICS. JRFM, MDPI, 15(2), 1-21.
Essien, E., Dominic, A., & Sunday, E. (2011). Effects of Price and Exchange Rate Fluctuations on Agriculture Exports in Nigeria.  International Journal of Economic Development Research and Innovation, 2(1), 1-10.
Fofanah, P. (2020). Effects of Exchange Rate Volatility on Trade: Evidence from West Africa. Journal of Economics and Behavioral Studies, 12(3), 32-52.
Frankel, J., & Rose, A. (1998). The Endogeneity of the Optimum Currency Area Criteria. Economic Journal, 08(449), 1009-1025.
Gumel, G., Madaki, I., & Sanni, M. (2017). The Effect of Exchange Rate Volatility on International Trade in Nigeria (1986-2015). Ilorin Journal of Management Sciences, 0(0), 32-44.
Hall, S., Hondroyamis, G., Swamy, P., Tavlas, G., & Ulan, M. (2010). Exchange Rate Volatility and Export Performance; Do Emerging Market Economies Resemble Other Industrial Economies or Other Developing Countries? Economic Modelling, 27, 1514-1521.
Ikechi, K., & Nwadiubu, A. (2020). Exchange Rate Volatility and International Trade in Nigeria.  International Journal of Management Sciences and Business Administration, 6(5), 6-72.
Khan, A., Azim, P., & Syed, S. (2014). The Impact of Exchange Rate Volatility on Trade: A Panel Study on Pakistanis Trading Partners. Lahore Journal of Economics, 19(1), 31-66.
Lawal, I., Salisu, A., Asaleye, A., Oseni, E., Lawal-Adedoyin, B., Dahunsi, S., Omoju, E., DickTonye, A., Ogunwole, E., & Babajide, A. (2022). Journal of Risk and Financial Management. 15(1), 1-13.
Musibau, B., & Hamed, H. (2017). Exchange Rate Volatility and Non-Oil Exports in Nigeria. Journal of Global Economics, 5(2), 1-5.
Musila, J. (2002). Exchange Rate Changes and Trade Balance Adjustment in Malawi. Canadian Journal of Development Studies, 23(1), 69-85.
Nguyen, V., & Thuy, D. (2019). The Impact of Exchange Rate Volatility on Exports in Vietnam: A Bound Testing Approach. Risk Financial Management, 12, 1-14.
Nishimura, Y., & Hirayama, K. (2013). Does Exchange Rate Volatility Deter Japan-China Trade?  Evidence from Pre- and Post-Exchange Rate Reform in China. Japan World Economy, 25, 90-101.
Njoroye, L, (2020). The Effects of Exchange Rate Volatility on Exports in COMESA: A Panel Gravity Model Approach. Journal of Applied Finance and Banking, 10(6), 203-228.
Onafowora, O., Babatunde, S., Halimah, A., & Hammed, A. (2017). Exchange Rate Volatility and Non-Oil Exports in Nigeria: Empirical Investigation. Journal of Global Economies, 5(2), 2-5.
Perasan, M., Shin, Y., & Smith, R. (1999). Pooled Mean-Group Estimation of Dynamic Heterogeneous Panels.  Journal of American Statistics Association, 94, 621-632.
Rasoulinezhad, E., & Popova, L. (2017). An Estimation of the Impact of Economic Sanctions and Oil Price Shocks on Iran-Russian Trade. Iranian Economic Review, 21(3), 469-497.
Rasoulinezhad, E. (2019). The Sanctions and Geographical Shift in Trading Partners: Evidence from Iran-Russia through a Gravity Model. Iranian Economic Review, 23(3), 953-620.
Rasoulinezhhad, E., & Kang, G. (2016). A Panel Data Analysis of South Korea’s Trade with OPEC Member Countries. Iranian Economic Review, 20(2), 203-224.
Senadza, B., & Diaba, B. (2017). Effect of Exchange Rate Volatility on Trade in SSA. Journal of African Trade, 14(1), 20-36.
Serenis, D., & Tsounis, N. (2014). Exchange Rate Volatility and Aggregate Exports: Evidence from Two Small Countries. Economics, 2014, 1-11.
Situ, J. (2015). The Impact of Exchange Rate Volatility on Export to USA: Comparison between DC and Export-Oriented LDC Countries.  International Journal of Business and Management, 10(5), 214-221.
Sugiharti, L., Angel, M., & Estyormi, B. (2020). The Impact of Exchange Rate Volatility on Indonesian Top Exports to the Five Main Export Markets. Heliyon, 6, 31-41.
Tarasenko, I. (2021). The Impact of Exchange Rate Volatility on Trade. The Evidence from Russia. Russia Journal of Economics, 7(3), 213-232.
Urenadu, S., Odili, O., & Ariwa, F. (2017). The Effect of Exchange Rate Variability on Trade Flows in Nigeria; a Cointegration Analysis. Quarterly Journal of Economics Research, 12(2), 19-51.
Wang, K., & Barret, C. (2007). Estimating the Effects of Exchange Rate Volatility on Export Volumes. Journal of Agriculture and Resource Economics, 32(2), 225-255
Yakub, M., Sani, Z., Obiezue, T., & Aliyu, V. (2019). Empirical Investigations of Exchange Rate Volatility and Trade Flow in Nigeria. Central Bank of Nigeria Economic and Financial Review, 57(1), 23-46.
Iranian Economic Review
Volume 28, Issue 3
September 2024
Pages 991-1021

Files

Share

How to cite

Statistics