Exchange Rate Volatility and Balance of Trade in Nigeria

The study examined exchange rate volatility and balance of trade in Nigeria from 1994Q1 – 2022Q4. The objectives of the study are to; determine the effects of dollar exchange rate, British Pound exchange rate and Euro exchange rate on Nigeria balance of trade. Data was collected from Central Bank of Nigeria statistical bulletin. The techniques adopted include; the unit root test, the Johansen cointegration, vector error correction model (VECM), and Generalized Autoregressive Conditional Heteroskedasticity (GARCH) model to capture the volatility of exchange rates. The GARCH model result showed that, volatility exists in exchange rate from 1994Q1 to 2022Q4. The unit root test result showed that, all the variables were stationary at first difference. While the co-intregration test showed that, there is long run relationship between the independent and the dependent variables. Based on the VECM results, it was reported that; exchange rate volatility has short run positive effect on balance of trade. Also, the past value of balance of trade is significant at 5percent. Based on the findings, it was recommended amongst others that, monetary authorities should design effective exchange rate regime so to ensure exchange rate stability which has the capacity to improve the trade position of the country.