Estimating the Long Run Effects of Exchange Rate Devaluation on the Trade Balance of Nigeria

European Scientific Journal Vol. 9 No. 25 (2013)

17 Pages Posted: 3 Feb 2015

See all articles by Adeyemi Ogundipe

Adeyemi Ogundipe

Covenant University

Paul Ojeaga

University of Bergamo

Oluwatomisin Ogundipe

Covenant University

Date Written: February 2, 2013

Abstract

This paper attempts an empirical investigation of the impact of currency devaluation on Nigeria trade balance using the Johansen co-integration and variance decomposition analyses from 1970-2010; whether exchange rate devaluation improves or worsens trade balance has been at the centre of literature debate over time with varying empirical evidences for developed and developing nation. The empirical results indicate that there exist a long-run stationary relationship between trade balance and its determinant- domestic income, domestic and foreign money supply, domestic interest rate and nominal exchange rate; as employed in the study. Also, there exists an inelastic and significant relation between trade balance and its determinants. Our major findings include; exchange rate induce an inelastic and significant relation on trade balance in the long run, there exist no short run causality from exchange rate to trade balance and money supply volatility contributes more to variance in trade balance than exchange rate volatility. The paper concludes with important implications for policy makers because it provides evidence supporting that fact that level of money supply has a major impact on trade balance adjustment and that devaluation of the exchange rate worsens the trade balance of Nigeria in the long run.

Keywords: Nigeria, devaluation, Johansen co-integration, variance decomposition, trade balance

Suggested Citation

Ogundipe, Adeyemi and Ojeaga, Paul and Ogundipe, Oluwatomisin, Estimating the Long Run Effects of Exchange Rate Devaluation on the Trade Balance of Nigeria (February 2, 2013). European Scientific Journal Vol. 9 No. 25 (2013), Available at SSRN: https://ssrn.com/abstract=2559012

Adeyemi Ogundipe (Contact Author)

Covenant University ( email )

Canaanland
Km 10 Idiroko road
Ota, 24001
Nigeria
+2348161927372 (Phone)

Paul Ojeaga

University of Bergamo ( email )

Via Salvecchio, 19
Bergamo, 24129
Italy

Oluwatomisin Ogundipe

Covenant University

P.M.B. 1023
Km 10 Idiroko road
Ota, Ogun State 234
Nigeria

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