EFFECTS OF EXCHANGE RATE VOLATILITY ON FOREIGN TRADE: AN ANALYSIS ON NIGERIA

Abstract

There is no agreement in the recent literature on the relationship defined between exchange rate volatility and trade flows. Some research shows a negative influence of exchange rate volatility on trade whilst other shows conflicting effects when imports and exports are analysed separately. Other studies find no significant effect in the presence of efficient financial markets. Since most of this literature focus on the developed economies, to fill the gap, this thesis evaluates the effect of exchange rate volatility on the volume of foreign trade, in the case of the West African country of Nigeria. The analysis exploits annual data from the period of 1985 to 2017 and focuses on both exports and imports. Since the available data has an annual frequency, the Moving Average Standard Deviation is used to ascertain an estimate for the volatility series over the period of study. The variables analysed were tested for stationarity using the Dickey Fuller Test, and the cointegrating relationships were also verified through the Johansen test of Cointegration. In particular, among the determinants of foreign trade, the role of volatility of exchange rates is investigated.