Estimating the Long Run Effects of Exchange Rate Devaluation on the Trade Balance of Nigeria

This paper attempts an empirical investigation of the impact of currency devaluation on Nigeria trade balance using the Johansen co-integration and variance decomposition analyses from 1970-2010; whether exchange rate devaluation improves or worsens trade balance has been at the centre of literature debate over time with varying empirical evidences for developed and developing nation. The empirical results indicate that there exist a long-run stationary relationship between trade balance and its determinant- domestic income, domestic and foreign money supply, domestic interest rate and nominal exchange rate; as employed in the study. Also, there exists an inelastic and significant relation between trade balance and its determinants. Our major findings include; exchange rate induce an inelastic and significant relation on trade balance in the long run, there exist no short run causality from exchange rate to trade balance and money supply volatility contributes more to variance in trade balance than exchange rate volatility. The paper concludes with important implications for policy makers because it provides evidence supporting that fact that level of money supply has a major impact on trade balance adjustment and that devaluation of the exchange rate worsens the trade balance of Nigeria in the long run