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Currency Devaluation and Trade Balance Nexus: A Test of Marshall-Lerner Condition in Nigeria

Author

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  • Are, Olasubomi

    (Small Business & Informal Economic Research Group, Department of Economics, University of Lagos Akoka, Akoka Lagos)

Abstract

Devaluation on the trade balance in recent times emerged as a vital policy issue in Nigeria due to the recent economic crisis. This paper examines the nexus between devaluation and Nigeria’s trade balance by empirically investigating the Marshall-Lerner condition using annual data covering the period of 1986-2015. It also examines the dynamics of the relation between Nigeria’s trade balance and the real exchange rate. The Engel-Granger OLS-based Cointegration technique and the Error Correction Mechanism (ECM) modelling technique were employed to conduct these analyses. Findings suggest that the Marshall-Lerner condition is not satisfied in Nigeria and that real exchange rate has no significant effect on the trade balance both in the long-run and short-run. Also, findings revealed that income effects dominate price effects on trade in Nigeria.

Suggested Citation

  • Are, Olasubomi, 2019. "Currency Devaluation and Trade Balance Nexus: A Test of Marshall-Lerner Condition in Nigeria," BizEcons Quarterly, Strides Educational Foundation, vol. 4, pages 23-43.
  • Handle: RePEc:ris:buecqu:0008
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    References listed on IDEAS

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    1. Boyd, Derick & Caporale, Gugielmo Maria & Smith, Ron, 2001. "Real Exchange Rate Effects on the Balance of Trade: Cointegration and the Marshall-Lerner Condition," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 6(3), pages 187-200, July.
    2. Bahmani-Oskooee, Mohsen, 1991. "Is there a long-run relation between the trade balance and the real effective exchange rate of LDCs?," Economics Letters, Elsevier, vol. 36(4), pages 403-407, August.
    3. Mohsen Bahmani & Hanafiah Harvey & Scott W. Hegerty, 2013. "Empirical tests of the Marshall-Lerner condition: a literature review," Journal of Economic Studies, Emerald Group Publishing, vol. 40(3), pages 411-443, May.
    4. Evans, Olaniyi & Adeniji, Sesan & Nwaogwugwu, Isaac & Kelikume, Ikechukwu & Dakare, Olamitunji & Oke, Olubode, 2018. "The relative effect of monetary and fiscal policy on economic development in Africa: a GMM approach to the St. Louis equation," BizEcons Quarterly, Strides Educational Foundation, vol. 2, pages 3-23.
    5. Morris Goldstein & Mohsin S. Khan, 2017. "The Supply and Demand for Exports: A Simultaneous Approach," World Scientific Book Chapters, in: TRADE CURRENCIES AND FINANCE, chapter 2, pages 83-104, World Scientific Publishing Co. Pte. Ltd..
    6. Nkenchor Neville Igue & Toyin Segun Ogunleye, 2014. "Impact of Real Exchange Rate on Trade Balance in Nigeria," African Development Review, African Development Bank, vol. 26(2), pages 347-358, June.
    7. World Bank, 2016. "World Development Indicators 2016," World Bank Publications, The World Bank, number 23969, December.
    8. Mohsen Bahmani & Hanafiah Harvey & Scott W. Hegerty, 2013. "Empirical tests of the Marshall-Lerner condition: a literature review," Journal of Economic Studies, Emerald Group Publishing, vol. 40(3), pages 411-443, July.
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    More about this item

    Keywords

    Exchange rate; Currency devaluation; Trade balance;
    All these keywords.

    JEL classification:

    • B41 - Schools of Economic Thought and Methodology - - Economic Methodology - - - Economic Methodology
    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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