An Econometric Analysis of the Effect of Exchange Rate Volatility on Tradable Goods in Nigeria, 1985-2008

Abstract

Exchange rate policy plays an important role in national economic development and management. Thus, the debate on exchange rate management has preoccupied economists and public sector managers for a very long time. The objective of this paper is to examine the effect of exchange rate volatility on tradable goods in Nigeria within the period 1985-2008. Pairwise Granger Causality Test and the Ordinary least Squares techniques of multiple regression were employed to analyse the data obtained from Central Bank of Nigeria as relate to the problem been investigated. We found that the Real terms of trade (Pt), real GDP (Yt) and volatility of real exchange rate (Vt) are major determinants of tradable goods. However, both V_t and Y_t present a statistically significant relationship with export while terms of trade does not. The inability of terms of trade to impact greatly on export might be attributed to external shocks especially international interest rates fluctuations, exchange rate variations, macroeconomic instability, and more. Thus, we recommend that the government should retain the current exchange rate policy management- market based regimewith slight modifications. The modifications should be targeted at enhancing the competitiveness of Nigeria’s tradable goods at the international market.

Key words: Exchange Rate, tradable goods and volatility