Abstract
AbstractThis paper empirically examines the long-run pass through of the official exchange rates into trade balance in Nigeria by means of threshold cointegration and asymmetric error correction modeling. The study provides evidence for non-linear cointegration between our variables of interest. The estimated asymmetric error correction models provide new evidence for slower transmission of exchange rate depreciations into the country’s trade balance, which in turn appears to offer partial support for the Dutch disease hypothesis. This finding suggests that policy-makers cannot hope to use currency devaluation to improve the trade balance. It is recommended that policy-makers focus attention on diversification of the economy away from dependence on crude oil exports into productive manufacturing and non-oil exports, which will be vital in making the economy more competitive.
Highlights
The interrelationships between exchange rates and trade balance have been extensively studied by international and financial economists
This study focuses on the different approaches in evaluating adjustments of the trade balance in response to changes in exchange rates
We provide new evidence that the balance of trade responds asymmetrically to changes in official exchange rate in Nigeria in the form of downward rigidity
Summary
The interrelationships between exchange rates and trade balance have been extensively studied by international and financial economists. Alhaji Jibrilla Aliyu is an academic staff in the Department of Economics, Adamawa State University, Mubi, Nigeria. He is a doctorate candidate in the Department of Economics at the University Putra Malaysia, and is being trained academically in international and ecological economics. Taking the case of a developing country such as Nigeria that heavily depends on oil exports, devaluation may not necessarily lead to improvement in the country’s trade balance. The paper challenges the current production structure of the Nigerian economy, and calls on policy-makers to device right choices that can minimize the country’s overdependence on natural resources, oil. Policies that will ensure productive human and physical capital are desirable to make the economy more competitive
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