Exchange Rate and Trade Balance: The Case for J-curve Effect in Nigeria

Exchange Rate and Trade Balance: The Case for J-curve Effect in Nigeria

Author by Dr. Adegbemi Onakoya

Journal/Publisher: Kiu Journal Of Social Sciences

Volume/Edition: 4

Language: English

Pages: 47 - 63

Abstract

The Nigerian currency has since the introduction of the Structural Adjustment Programme (SAP) of 1986 has been continually depreciated except for a few years. This study investigated the “J-curve” effect which is the nexus between trade balance (TB) and the real effective exchange rate (REER) in Nigeria. It adopted Johansen Cointegration following the outcome of the preliminary Augmented DickeyFuller (ADF) test for stationarity of the data series in the model from 1981 to 2016. The Granger causality and the Impulse Response Function tests were also deployed. The postestimation diagnostic validation conducted included the normality, heteroskedasticity and autocorrelation tests. Empirical evidence from this study showed that in the short run, the trade balance benefited from the devaluation of the Naira rather than suffer deleterious consequences. There was no long run relationship between the dependent variable, (TB) and the explanatory variables, REER and GDP. In Nigeria, it was the inverted J-curve effect. The evidence from impulse response function corroborated the inconsistent long run relationship beyond the fourth year. There was the absence of Granger-causality directions amongst the variables. In view of the contrarian findings of this study, the Nigerian policy makers are enjoined to allow the financial markets determine exchange rates. Exception can be made for priority areas of the economy with the capacity to benefit the strategic intent of
governance. In this investigation of the exchange rate and trade balance nexus, the case for J-curve effect has not been made in Nigeria.  
 


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