Academic journal article Journal of Emerging Trends in Economics and Management Sciences

An Empirical Analysis of Exchange Rate Volatility on Export Trade in a Developing Economy

Academic journal article Journal of Emerging Trends in Economics and Management Sciences

An Empirical Analysis of Exchange Rate Volatility on Export Trade in a Developing Economy

Article excerpt

Abstract

This paper investigates the impact of exchange rate volatility on export in Nigeria. The paper employed three models, viz: Ordinary Least Square (OLS); Granger causality test; and ARCH and GARCH techniques and also Augmented Dickey-Fuller technique was used in testing the presence of unit root. The results of unit root suggested that all the variables in the model are stationary at first difference, while causality test revealed that there is causation between export and exchange rate in the country, but the causation flows from exchange rate to export. Thus, exchange rate causes export. Furthermore, ARCH and GARCH results suggested that the exchange rate is volatile nevertheless export is found to be non-volatile. The study further showed that exchange rate is impacting positively on export, as shown by the regression results. The elasticity results revealed that, the demand for Nigerian products in the World market is fairly elastic. Therefore, for export to improve and foreign exchange earnings increase, the country should depreciate its currency, thereby reducing the price of its products so as to increase demand, which is changing from import-led to export-led economy. Consequently, in order to improve exports, efficient delivery services are needed, such as; power supply, energy resources and infrastructure. The significance of this paper is that, it stands to be a guide to policy makers. It has also push forward empirical discourse and provided literature to future research. Finally, this research recommends the pursuance of a stable and sustainable exchange rate policy and to put in place measures that will promote greater exchange rate stability and improve terms of trade, promote greater openness in order to augment non-oil exports. Hence, these measures could greatly promote export trade.

Keywords: exchange rate, volatility, export, ARCH and GARCH

(ProQuest: ... denotes formulae omitted.)

INTRODUCTION

Ever since the breakdown of the Bretton Woods System in the early 1970s, when previously fixed exchange rates among major currencies were allowed to float, researches have been interested in the effects of greater exchange rate volatility on exports. There has been significant disagreement throughout the years with evidence on both positive and negative impacts of volatility on nation's exports. Most of the earlier studies such as Thursby & Thursby (1987) found large negative impacts of the exchange rate volatility on trade. Later work, on the other hand, found both small negative (e.g. Frankel and Wei, 1993; Eichengreen and Irwin, 1995; Frankel, 1997) and positive effects (Klein, 1990). Research related to exchange rate management still remains of interest to economists, especially in developing countries, despite a relatively enormous body of literature in the area. This is largely because the exchange rate in whatever conceptualization, is not only an important relative price, which connects domestic and world markets for goods and assets, but it also signals the competitiveness of a country's exchange power vis-à- vis the rest of the world in a pure market. Besides, it also serves as an anchor which supports sustainable internal and external macroeconomic balances over the medium-to-long term. There is, however, no simple answer to what determine the equilibrium exchange rate, and estimating equilibrium exchange rates and the degree of exchange rate misalignment remains one of the most challenging empirical problems in open-economy macroeconomics (Williamson, 1994). The fundamental difficulty is that the equilibrium value of the exchange rate is not observable. While the exchange rate misalignment refers to a situation in which a country's actual exchange rate deviates from such an unobservable equilibrium, an exchange rate is said to be "undervalued" when it depreciates more than its equilibrium, and "overvalued" when it appreciates more than its equilibrium. The issue is, unless the "equilibrium" is explicitly specified, the concept of exchange rate misalignment remains subjective. …

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