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Trade Flows and Exchange Rate Shocks in Nigeria: An Empirical Result

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  • David UMORU

    ()
    (Department of Economics, Banking & Finance, Faculty of Social & Management Sciences, Benson Idahosa University, Nigeria)

  • Adaobi S. OSEME

    (Department of General Studies, (Economics Unit), Delta State Polytechnic, Ogwashi-Uku, Delta State, Nigeria)

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    Abstract

    In this paper, we explored the J-curve effect based on Nigerian data by adopting the vector error correction methodology. The results of the study indicated a cyclical feedback between the trade balance and the real exchange rate depreciation of the Naira. However, the analysis finds no empirical evidence in favour of the short-run deterioration of the trade balance as implied by the J-curve hypothesis. Rather, what is empirically supported is the cyclical trade effect of exchange rate shocks. As it were, a real exchange rate shock will initially improve then worsen and then improve the country’s aggregate trade balance. The instant improvement in the trade balance which is correlated with real depreciation provides no support for the J-curve hypothesis in the Nigerian trade balance. Hence, the short-run predictions of the J-curve are not observable in Nigeria.

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    Bibliographic Info

    Article provided by Asian Economic and Social Society in its journal Asian Economic and Financial Review.

    Volume (Year): 3 (2013)
    Issue (Month): 7 (July)
    Pages: 948-977

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    Handle: RePEc:asi:aeafrj:2013:p:948-977

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    Keywords: Trade flows; exchange rate shock; VECM; Nigeria;

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