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EMPIRICAL INVESTIGATION ON EXCHANGE RATE VOLATILITY AND TRADE FLOWS IN NIGERIA
Abstract
This paper investigated the impact of exchange rate volatility on trade flows in Nigeria using monthly data for the period 1997 – 2016. A GARCH model was used to generate the nominal exchange rate volatility series. To detect the long-run relationship among variables, the ARDL bounds testing approach was employed. Also, the Granger causality test was applied to ascertain the direction of causality among the variables. The study found that exchange rate volatility affected Nigeria’s trade flows negatively, in the short-run but does not in the long-run. As such the Central Bank of Nigeria would find some trade benefits from intervening immediately to stabilise the foreign exchange market in the face of volatility. Also, the study showed that ignoring exchange rate volatility could negatively impact on Nigeria’s trade flows especially in the short-run.
Keywords: Volatility, Exchange Rate, Trade Flows