Exchange Rate Volatility and Balance of Payments Problem in Nigeria, 1980-2016

Akatugba D. Oghenebrume^1,

¹Department of Economics, Faculty of Social Sciences, Niger Delta University, Amassoma, Nigeria

Cite this paper:
Akatugba D. Oghenebrume. Exchange Rate Volatility and Balance of Payments Problem in Nigeria, 1980-2016. Journal of Finance and Economics. 2018; 6(2):60-66. doi: 10.12691/jfe-6-2-4

Abstract

There is a growing agreement in the literature that prolonged and substantial exchange rate volatility can create severe macroeconomic disequilibria and the correction of external balance will require both exchange rate devaluation and demand management policies. The main intuition behind this is that an increase in exchange rate volatility leads to uncertainty which might have a negative impact on trade flows. Consequent upon the above, this study focused on the effect of exchange rate volatility on balance of payments in Nigeria, 1980 to 2016. Exchange rate volatility was measured using the GARCH approach. The empirical results confirmed that exchange rate is positively related to balance of payments; while real gross domestic, inflation rate and volatility of exchange rate are negatively related to balance of payments. Therefore government should not underplay exchange rate volatility in Nigeria. In addition, government should encourage export promotion strategies in order to maintain a surplus balance of trade which will help make the domestic currency strong and also prevent further depreciation of the Nigeria naira in the future.

Keywords:
exchange rate volatility and balance Garch approach

This work is licensed under a Creative Commons Attribution 4.0 International License. To view a copy of this license, visit http://creativecommons.org/licenses/by/4.0/

References:

[1]	Arize, Osang, & Slottje (2008). Exchange-rate volatility in Latin America and its impact on foreign trade. International Review of Economics and Finance, 17, 1.
[2]	Alaba, B. O. (2003). Exchange rate uncertainty and foreign direct investment in Nigeria. Trade policy Research and Training Programme (TRRTP). Department of Economics, University of Ibadan, Nigeria.
[3]	Sani, H.T. (2006). The challenges of sustainability of the current exchange rate regime in Nigeria. Central bank of Nigeria Bulletin, 20(3), 26-37.
[4]	Aguirre, A., & Caldero, C., (2005). Real exchange rate misalignments and economic performance. Central Bank of Chile Working Paper 315.
[5]	Anderton, R., & Skudenlry, F. (2001). Exchange rate volatility and Euro area imports. ECB workings paper No 67.
[6]	Ngerebo-a, T.A., & Ibe, R. C. (2013). Exchange rate and macroeconomic performance in Nigeria: A causal post structural adjustment programme investigation. Global Journal of Management and Business Research Finance, 13(7).
[7]	Mordi, C.N. O. (2006). Challenges of exchange rate volatility in economic management in Nigeria. Central Bank of Nigeria Bullion, 30(3).
[8]	Gbosi, A. N. (2001). Contemporary Macroeconomic Problems and Stabilization Policies. Antoric Ventures, Port Harcourt.
[9]	Sodersten, B. O. (1980), International Economics, London and Basingstoke: The MacMillan Press Ltd.
[10]	Crockett, A., (1977). International Money: Issues and Analysis, New York Academic Press. Curran, Jamesand Park.
[11]	Machlup, F. (1995). International Payments Debt and Gold. New York: C Scribers.
[12]	Dhliwayo, R. (1996), The Balance of Payments as a Monetary Phenomenon. An Econometric study of Zimbabwe's Experience. African Economic Research Consortium, Kenya, Research Paper 46.
[13]	Baxter, M., & Stockman, A. C. (1989). Business cycles and exchange-rate regime: Some international evidence. Journal of Monetary Economics, 23, 377-400.
[14]	Onuchukwu, O., & Kalu, E. (1999). Exchange rate variation and Nigeria's balance of payments. Nigerian Journal of Monetary Economics,. 2 (3 & 4). University of Port Harcourt.
[15]	Broda, C., & Romalis, J. (2003). Identifying the effect of exchange rate volatility on trade. American Economic Review 93(2).
[16]	Bernardina, A. (2004). Price and income elasticities of Russian exports. The European Journal of Comparative Economics, 1 (2), 175-193.
[17]	Saadet, K., & Ayhan, D. (2008). Macroeconomic volatility under alternative exchange rate regimes in Turkey. Central Bank Review, 2, 37-58.
[18]	Ogbonna, B.C. (2011). The impact of exchange rate variation on trade balance: Evidence from Nigeria; 1970 ¨C 2005. JORIND, 9(2), 393-403.
[19]	Polodoo, V., Seetanah, B., & Padachi, K. (2012). Exchange rate volatility and macroeconomic performance in small island developing state. A paper presented at the Uom-Wcp international conference at Le Meridien, Mauritius On 22 December 2012.
[20]	Rodrik, D. (2009). The real exchange rate and economic growth. In D. W. Elmendorf, N. G. Mankiw, and L. H. Summers (Eds.), Brookings Papers on Economic Activity. Brookings Institution, Washington DC Falls.
[21]	Rasaq, A.D. (2013). The impact of exchange rate volatility on the macroeconomic variables in Nigeria. European Scientific Journal, 9(7), 152-165.
[22]	Umoru, D., & Odegba, O.P. (2013). Exchange rate misalignment and balance of payment adjustment in Nigeria. European Scientific Journal, 9 (13), 260-273.
[23]	Adubi, A. A. & Okunmadewa, F. (1999). Price, exchange rate volatility and Nigeria's agricultural trade flows: A dynamic analysis. In AERC Research paper 87, African Economic Research Consontium Nairobi March.
[24]	Clark, Tamirisa, Wei, Sadikov; & Zeng (2004). Exchange rate volatility and trade flows: Some new evidence. IMF Working paper.
[25]	Bollerslev, T., Chou, R.Y., & Kroner, K.F. (1992). ARCH modeling in finance: A review of the theory and empirical evidence. Journal of Econometrics, 55, 5-59.
[26]	Engle, R.I., & Granger, C.W. (1987). Co-integration and Error Correction: Representation, Estimation and Testing. Econometrica, 55(2): 251-276.
[27]	Perron, P. (2006). Dealing with Structural Breaks. Palgrave Handbook of Econometrics, 1, 278-352.
[28]	Perron, P. (1989). The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis. Econometrica, 57, 1361-1401.