Exchange Rate, Trade Balance And Growth In Nigeria: An Asymmetric Cointegration Analysis

Abstract

Background and Statement of the Problem: It has been established that countries with high political and economic risks will draws investment funds away prospective investors from other countries, thus, such countries are at greater risks of loss of confidence in her currency stability and movement of capital to more stable economies. The aforementioned problems may discourage growth, macroeconomic stability, human capital development and institutional changes. Thus, there is the need to investigate the asymmetric cointegrating relationship, if any among the rate of exchange, trade balance and growth in Nigeria. Research Methodology and Data: With the primary assumption of the likelihood of an asymmetric adjustment process in the disequilibrium, the study deployed the M-TAR (Momentum - Threshold Autoregressive) and the TAR (Threshold Autoregressive) models. Annual data on imports, exports, domestic real income, world real income, domestic consumer price index and US consumer price index were used and this comes from the World Bank Development Indicators for the period 1960–2016 and all data are denominated in US-Dollars. Research Findings: The result shows that for the TAR model, cointegration exists among the three variables (economic growth, balance of trade and real exchange rate). An asymmetric adjustment disequilibrium process also exists. The point estimates suggest that the adjustment speed is lower when the balance of trade is worsens. The asymmetric ECM suggests that trade balance, real exchange rate and growth respond to disequilibrium and that the coefficient of domestic income and exchange rate are negative and that of foreign income is positive and statistically significant. Policy Implication: Government of Nigeria should concentrate her policy efforts towards import substitution strategy that will facilitate the production of currently imported goods locally, thereby creating sustainable employment and development of industrial manufacturing sector in Nigeria.