General equilibrium analysis of the causes and effects of exchange rate volatility on export demand in Nigeria (1986-2013)

This thesis provides empirical analyses of the relationship between exchange rate volatility (ERV) and export demand in Nigeria using the Nigeria-United States disaggregated bilateral quarterly export data from 1986Q3 to 2013Q4. Firstly, the study examines the contribution of macroeconomic (such as monetary and real) shocks to exchange rate volatility (ERV) in Nigeria using quarterly data from 1986Q3 to 2013Q4. The examination is to ascertain the determinants of ERV in Nigeria through internally generated volatility (endogenous volatility) in the exchange rate. Secondly, the endogenous volatility is employed to investigate the relationship between ERV and trade using the general equilibrium approach. The study employs the oil and agriculture export model for the trade analysis because Nigeria's net export largely deteriorates from 26.2% in 2012 to -40.1% in 2013, which is a negative indication to economic growth. This study recognizes the role of oil price, interest rate and income in ERV determination. Also, it recognizes the role of price and income in the relationship between ERV and export demand in Nigeria. The BEKK Multivariate Generalized Autoregressive Conditional Heteroscedastic (BEKK-MGARCH) model together with the volatility impulse response functions (VIRFs) are employed for the analysis of exchange rate volatility modeling. While the autoregressive distributed lag (ARDL) model is employed for the sectoral export demand modeling. The results provide strong evidence that previous shocks from interest rate, productivity growth, and oil price significantly influence exchange rate volatility in Nigeria between 1986 and 2013. Also, volatilities from interest rate and productivity growth significantly contribute to ERV while oil price provide mixed results for volatility spillover to ERV in Nigeria. The results from the exchange rate model indicate that exchange rate volatility in Nigeria increased due the shock effects from the interest rate and productivity growth employed in the model. ii From the trade model, the study provides robust evidence that increase in ER volatility reduces the volume of export in the Nigerian oil and agricultural sector between 1986 and 2013. The evidence from this study supports the theoretical model that effect of exchange rate volatility on trade flow arises from the factors that drive ERV. The multiplier analysis of the ARDL techniques shows that the immediate effect of ERV on export demand in Nigeria between 1986 and 2013 has a high magnitude, which gradually dies off. The policy implications of the finding of this thesis are in three-fold. Firstly, this study confirmed that shocks to exchange rate overtime are orchestrated by policy reversal from unstable political regime in Nigeria. The shocks to exchange rate overtime subsequently led to general high volatilities in the exchange rate, interest rate and output growth as well as overall unstable economy. The higher interest rate and output growth shocks and volatilities increase ERV, which in turn, deteriorates trade in oil and agricultural sectors. Thus, this study suggests that policy reversal under political regime shift should be controlled in Nigeria. Secondly, interest rate volatility is found in this study to escalate volatility of exchange rate overtime. Thus, this study suggests that a practical and stable monetary policy that will lower ERV is needed to boost trade in the two productive sectors in Nigeria. This will help to control the volatilities in the economy that is due to monetary volatility as well as real economy volatility. Thirdly, this study finds that exchange rate variation alone cannot explain the full degree of trade imbalances in Nigeria. Thus, exchange rate arrangement is only a part of the needed resolution to trade improvement. The study, therefore, suggests that full resolution to trade development be pursued alongside other policy actions such as monetary policy. The study made the suggestion because this thesis confirms that there is an indirect effect from the monetary factor to trade. Finally, this study concludes that Nigeria political regime and monetary policy should be reviewed and become stable to allow a sustainable and enduring economic growth.