Abstract
This paper investigates the asymmetric effect of exchange rate changes on cross-border trade in Nigeria. The investigation becomes necessary because several studies have reported insignificant results in attempting to establish a link between these two variables using symmetric specification. Whereas, there are strong evidence of nonlinear mean-reverting association because some exchange rate changes of the same magnitude exhibit different effects on other variables of interest. Having separated the real effective exchange rate into both depreciation and appreciation regimes using the partial sum processes based on logistic smooth-transition and exponential smooth-transition, results from the nonlinear autoregressive distributed lags show that exchange rate appreciation had a statistically significant negative relationship with cross-border trade in Nigeria. The study concludes that the relationship between real effective exchange rate and cross-border trade is asymmetric. (Depreciation and appreciation of equal magnitude do not have the same effect on cross-border trade in Nigeria.) The study recommends that policy makers should consider models that allow a nonlinear adjustment of exchange rates which may produce outcomes supporting an effective devaluation or appreciation policy, at least against some trading partners.
Highlights
Cross-border trade (CBT) is a global phenomenon
In the long-run where most models of trade usually draw inferences from; it is observed that when real effective exchange rate appreciates by a percentage, cross-border trade volume decreases by 42%
The morale behind the nonlinear autoregressive distributed lag (ARDL) analysis is premised on the unending insignificant relationships that exist between exchange rate and bilateral trade as reported by many authors and on the high probability of model misspecification
Summary
Cross-border trade (CBT) is a global phenomenon. Ahmed et al [1] point out that this high economic growth is not unconnected with vast cross-border trading in energy resources among countries in the ASEAN sub-region. Theoretical literature on exchange rate emphasizes how the link between exchange rate and cross-border trade is established. Empirical literature has reported mixed results at best in establishing a relationship between exchange rate changes and trade balance both descriptively and empirically [5]. Symmetry effect suggests that if exchange rate depreciation improves CBT, appreciation worsens it. One, it can occur the moment positive and negative deviations revert back to the mean.
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