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What nexus exists between exchange rate and trade balance? The case of Nigeria vis-à-vis UK, US and Hong Kong

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  • Raifu, Isiaka Akande
  • Aminu, Alarudeen
  • Adeniyi, Oluwatosin Ademola

Abstract

The role of exchange rate movements in determining the trading position of a country and the ultimate welfare of its people vis-à-vis its trading partners is enormous. Consequently, this study is conducted to examine the nature of the trading relationship between Nigeria and its trading partners in three continents-North America, Europe and Asia. The study specifically focuses on how the fluctuation of naira vis-à-vis the pound sterling, dollar and Yuan affects Nigeria's trading position in relation to UK, US and Hong Kong (China). Quarterly data that span the period from 1981 to 2015 were used and linear and Non-linear ARDL estimation techniques were deployed to prove the existence of linear and nonlinear J-Curve. The findings, based on linear ARDL, show no proof of J-Curve in all the models, however, cointegration exists between the trade balance and the exchange rate dynamics. In non-linear ARDL, the existence of J-Curve is only observed in Nigeria-Hong Kong model. However, the findings show that there is both the existence of cointegration and the short-run and the long-run asymmetric nexus between exchange rate dynamics and trade balance in all the models. The overarching implication of the finding is that devaluation of Naira will not improve Nigeria’s trading position vis-à-vis trading partners considered.

Suggested Citation

  • Raifu, Isiaka Akande & Aminu, Alarudeen & Adeniyi, Oluwatosin Ademola, 2019. "What nexus exists between exchange rate and trade balance? The case of Nigeria vis-à-vis UK, US and Hong Kong," MPRA Paper 92976, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:92976
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    References listed on IDEAS

    as
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    6. Bahmani-Oskooee, Mohsen & Baek, Jungho, 2016. "Do exchange rate changes have symmetric or asymmetric effects on the trade balance? Evidence from U.S.–Korea commodity trade," Journal of Asian Economics, Elsevier, vol. 45(C), pages 15-30.
    7. Aniekan Okon AKPANSUNG & Sikiru Jimoh BABALOLA, 2013. "Effects of Real Exchange Rate on Trade Balance: Empirical Evidence from Nigeria," Asian Journal of Empirical Research, Asian Economic and Social Society, vol. 3(5), pages 605-617.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Exchange Rate Dynamics; Trade Balance; J-Curve; ARDL; NARDL;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange

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