THE SUMMARY OF THE EFFECT OF EXCHANGE RATE VOLATILITY ON TRADE

FLOW IN NIGERIA

This study examined the effect of exchange rate volatility on trade flow in Nigeria. The
study employed generalized autoregressive conditional heteroskedasticity (GARCH) and
autoregression conditional hetetrosdasticity (ARCH) Model. Before model estimation
was performed, unit root and cointegration tests were conducted in order to ascertain the
stationarity status and long-run properties of the variables used for the study. Findings
from the unit root test showed that almost all the time series considered were non-
stationary at level but became stationary after first difference. The cointegration test
result from the Johansson cointegration showed that the variables are cointegrated,
which implies that the time series variables considered have long-run equilibrium
relationship. Findings from the study showed that almost all the explanatory variables
such as money supply (MSS), trade openness (OPENS) and excise duty (EXD) in the
regression analysis of model one equation were significant except real exchange rate that
were statistically insignificant. Finding from the ARCH and GARCH regression result,
also show that the coefficients of real exchange rate (REXR) and trade openness
(OPENS) were positive while the coefficient of money supply (MSS) and excise duty
(EXD) were negative. Also, finding from this research study showed that almost all the
explanatory variables in the regression analysis for model two revealed that money
supply (MSS) and excise duty (EXD) were statistically significant exception of trade
openness that is statistically insignificant. Finding from the ARCH and GARCH
regression result in model two also showed that the coefficients of all the explanatory
variables positively affect the real exchange rate volatility. Based on the findings from
the study, the following recommendations were made among others that; monetary
authorities in Nigeria should initiate policies and programme that will stabilize naira
exchange rate and remove the negative effect of exchange rate fluctuations on Nigeria’s
export performance. Also; the study recommend that adequate measures should be put in
place by government to enhance the local sourcing of raw materials and manufacturing
input through effective regulatory mechanisms and fiscal incentives in order to ensure
that there is link between agriculture and the manufacturing sector that will lead to
expansion of export base which would attract more foreign exchange into the country.