Journal of Emerging Trends in Economics and Management Sciences (JETEMS) 4(1): 42-53

Scholarlink Research Institute Journals, 2013 (ISSN: 2141-7024)

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Journal of Emerging Trends in Economics and Management Sciences (JETEMS) 4(1):42-53 (ISSN:2141-7024)

An Empirical Analysis of Exchange Rate Volatility on Export Trade

In a Developing Economy
1
Aminu Umaru ; 1Bello Malam Saidu1 and 2Salihu Musa
1
Department of Economics,
School of Management & Information Technology,
Modibbo Adama University of Technology, Yola, Adamawa State, Nigeria.
2
Depertment of Agric Economics,
Faculty of Agriculture, Federal University, Dutse, Jigawa State, Nigeria.
Corresponding Author: Aminu Umaru
___________________________________________________________________________
Abstract
This paper investigates the impact of exchange rate volatility on export in Nigeria. The paper employed three
models, viz: Ordinary Least Square (OLS); Granger causality test; and ARCH and GARCH techniques and also
Augmented Dickey-Fuller technique was used in testing the presence of unit root. The results of unit root
suggested that all the variables in the model are stationary at first difference, while causality test revealed that
there is causation between export and exchange rate in the country, but the causation flows from exchange rate
to export. Thus, exchange rate causes export. Furthermore, ARCH and GARCH results suggested that the
exchange rate is volatile nevertheless export is found to be non-volatile. The study further showed that exchange
rate is impacting positively on export, as shown by the regression results. The elasticity results revealed that, the
demand for Nigerian products in the World market is fairly elastic. Therefore, for export to improve and foreign
exchange earnings increase, the country should depreciate its currency, thereby reducing the price of its products
so as to increase demand, which is changing from import-led to export-led economy. Consequently, in order to
improve exports, efficient delivery services are needed, such as; power supply, energy resources and
infrastructure. The significance of this paper is that, it stands to be a guide to policy makers. It has also push
forward empirical discourse and provided literature to future research. Finally, this research recommends the
pursuance of a stable and sustainable exchange rate policy and to put in place measures that will promote greater
exchange rate stability and improve terms of trade, promote greater openness in order to augment non-oil
exports. Hence, these measures could greatly promote export trade.
_________________________________________________________________________________________
Keywords: exchange rate, volatility, export, ARCH and GARCH
__________________________________________________________________________________________
INTRODUCTION vis the rest of the world in a pure market. Besides, it
Ever since the breakdown of the Bretton Woods also serves as an anchor which supports sustainable
System in the early 1970s, when previously fixed internal and external macroeconomic balances over
exchange rates among major currencies were allowed the medium-to-long term. There is, however, no
to float, researches have been interested in the effects simple answer to what determine the equilibrium
of greater exchange rate volatility on exports. There exchange rate, and estimating equilibrium exchange
has been significant disagreement throughout the rates and the degree of exchange rate misalignment
years with evidence on both positive and negative remains one of the most challenging empirical
impacts of volatility on nations exports. Most of the problems in open-economy macroeconomics
earlier studies such as Thursby & Thursby (1987) (Williamson, 1994). The fundamental difficulty is
found large negative impacts of the exchange rate that the equilibrium value of the exchange rate is not
volatility on trade. Later work, on the other hand, observable. While the exchange rate misalignment
found both small negative (e.g. Frankel and Wei, refers to a situation in which a countrys actual
1993; Eichengreen and Irwin, 1995; Frankel, 1997) exchange rate deviates from such an unobservable
and positive effects (Klein, 1990). Research related to equilibrium, an exchange rate is said to be
exchange rate management still remains of interest to undervalued when it depreciates more than its
economists, especially in developing countries, equilibrium, and overvalued when it appreciates
despite a relatively enormous body of literature in the more than its equilibrium. The issue is, unless the
area. This is largely because the exchange rate in equilibrium is explicitly specified, the concept of
whatever conceptualization, is not only an important exchange rate misalignment remains subjective. The
relative price, which connects domestic and world problem of subjectivity is, especially so, according to
markets for goods and assets, but it also signals the Chang and David (2005) because exchange rate
competitiveness of a countrys exchange power vis-- equilibrium or misalignment is measured over
42
Journal of Emerging Trends in Economics and Management Sciences (JETEMS) 4(1):42-53 (ISSN:2141-7024)
different time horizons. Notwithstanding, Edwards
(1989) states that the equilibrium real exchange rate
(RER) prevails when given sustainable values for
other relevant variables, such as terms of trade,
capital and aid flows, and technology, the economy
achieves both internal and external equilibrium.
Exchange rate is a prominent determinant of world
trade, receiving much attention in the context of
global imbalances. Past decades witnessed disputes
on trade and exchange rate issues. Recent disputes on
trade surplus and deficit between the United States of
America (USA) and China is believed to be
resolvable through adjustments to exchange rate by
China. Disparity in Chinas Yuan exchange rate to
the US dollar, favour Chinas trade surplus with the
US. Oguro, et al (2008) observed that the Marshal-
Lerner condition, requiring the sum of the absolute
values of price elasticities of imports and exports to
exceed one for an appreciation of the result in a
deterioration of a countrys balance of trade, is the
focus of new studies at explaining the effect of
exchange rate on trade balances.
Hooper et al (1998) and Chinn (2004; 2005) found
that dollar trade flows are significantly affected by
real exchange rates. In his study, Thorbecke (2006)
noted that though the above is true, exchange rate
elasticities for trade between the US and Asia are not
large enough to lend confidence that the depreciation
of the US $ will improve the US trade balance with
Asia. Comparing this with the multilateral trade
balance approach, Oguro et al (2008) observed that
that aggregate bias problems are reduced in bilateral
trade analysis. In their study of trade between the US
and Japan, Breuer and Clements (2003) concluded
that trade between the two countries are affected by
exchange rate elasticities. Commenting, Oguro, et al
(2008) opined that sensitivity of export trade to
exchange rate changes is dependent on certain
conditions. Using a six-industry-panel data to
investigate 48 industries, specific sensitivity of
exports to exchange rates for 38 trading pairs
including China, USA and Japan, they concluded that
higher inter-industry trade reduces the export
sensitivity to exchange rates due to lower elasticity of
substitution among differentiated products; but where
inter-industry trade does not exist, exchange rate
changes affect export trade. The existence of these
conditions according to Cui and Syed (2007), does
not eliminate the dependence of export trade on
exchange rate volatility; insisting that Chinas trade
growth with the US is hinged on favourable exchange
rate of Chinas Yuan to the US$. Like in China, the
Central Bank of Nigeria allow a market
determination of her naira to other foreign currencies;
intervening intermittently to redirect and stabilize it.
As in other economies, such actions are to achieve
overall economic growth. Moreover, WDI (2006)
stated that Nigerias non-oil export volume grew by
43
1.9% on the average between 1990-2004; while non-
oil export value grew by 5.2% within the same
period, reversing a decline of -4.4% and -20.8% of
export volume and value respectively in the 1980-
1990 period.
Nigerias tariff and trade policies has been
characterized by uncertainty and counter policies; to
which the government established a market
determined nominal exchange rate using the inter-
bank foreign exchange market (IFEM), the
autonomous foreign exchange market (AFEM), and
the Dutch auction system (DAS) at different times to
avoid overvaluation of the Naira exchange rate and
boost non-oil export. At the foreign exchange market,
the naira depreciated consistently against major
foreign currencies which in theory should improve
export performance as witnessed in china. Findings
by Caballero and Corbo (1989) of the effect of
individual European Union country currency
depreciation on individual country export trade,
support this thought: national currency depreciation
affecting export trade positively. In addition, Chukwu
(2007) observed the instability exchange rate as a
determinant of trade in Nigeria: having a positive
influence on the dependent variable, export trade; and
at other times a negative influence. This suggests an
erratic change in its value having a long-run effect on
export and economic growth. Studies conducted by
(Osuntogun et al, (1993); and Obadan, (1994) on the
naira exchange rate impact on export trade focused
on the effect of stable exchange rate on Nigerias
export performance.
THE PROBLEM
There is growing agreement in the literature that
prolonged and substantial exchange rate
misalignment can create severe macroeconomic
disequilibria and the correction of external balance
will require both exchange rate devaluation and
demand management policies. The main intuition
behind this is that an increase in exchange rate
volatility leads to uncertainty which might have a
negative impact on trade flows. According to
Anderton and Skudely (2001) the economic logic
underpinning the negative link is the aversion of
firms to engage in a risky activity, namely trade.
Thus, Baldwin, Skudelny and Taglioni (2005)
discovered that the effect of exchange rate
uncertainty on trade in the European Union (EU)
countries is negative; trade increases as volatility falls
and gets progressively larger as volatility approaches
zero. However, numerous studies were conducted on
the extent of Naira exchange rate and its
misalignment in Nigeria (see Soludo and Adenikinju,
1997; Obaseki, 2001; CBN, 2005; CBN, 2008; CBN,
2009), assessment of the impact of exchange rate
volatility on export has in the recent past been
nonexistent. It is against this background, that this
work seeks to quantitatively measure the impact of
Journal of Emerging Trends in Economics and Management Sciences (JETEMS) 4(1):42-53 (ISSN:2141-7024)
exchange rate volatility on non-oil export trade in
Nigeria from 1970 to 2009. On practical front,
exchange rate in Nigeria has been highly volatile and
favoured foreign currencies such as Dollars, Euro,
Pounds etc. which is detrimental to the growth of
export trade as well as the growth of the economy as
a whole.
Contribution of the Paper to Knowledge
Contribution of the paper on policy formulation is
that the findings of the research present an important
ground for formulating trade policy, i.e. export-led
economy. On empirical front, the paper also pushes
forward empirical discourse and provided literature to
future research.
LITERATURE REVIEW
Theoretical Framework
Export income is a function of export price and
volume of goods, and the exchange rate of the local
currency to the international currency. Production
volume for export been fairly stable (Adubi &
Okunmadewa, 1999; and Chukwu, 2007) suggest
export drive as based on export price (itself fairly
stable) and the fluctuations in the exchange rate.
Fluctuations, positive or negative, influence export:
increasing export when depreciation occurs and
decreasing export when exchange rate appreciations
occur. The traditionalist view on the impact of
currency depreciation on trade indicates that it leads
to an expansion in trade via lower export prices. The
structuralist school, however, stresses some
contractionary effects, Meade (1951). Hirschman
(1949) points out that currency depreciation from an
initial trade deficit reduces real national income and
may lead to a fall in aggregate demand. Kandil and
Mirzaie (2002) argued that currency depreciation
gives with one hand, by lowering export prices and
takes away with the other hand, by raising import
prices. They observed that if trade is in balance and
terms of trade remain unchanged, these price changes
offset each other, especially when the famous
Marshall-Lerner condition is not satisfied. If imports
exceed exports, the end result is a reduction in real
income within a country. See Krugman & Taylor
(1978) and Edward (1988 and 1989).
It is a widely accepted tenet that chronic
misalignment in the real exchange rate has been a
major source of slow growth in Africa and Latin
America, while prudent macroeconomic, trade and
exchange rate policies have fostered growth in Asia
(World Bank, 1984; Edwards, 1988; Ghura &
Grennes, 1993; and Yotopoulos, 1996). Yotopoulos
& Sawada (2005), systematic deviations of nominal
exchange rate (NER) from their purchasing power
parity (PPP) levels may engender serious instabilities
of the international macroeconomic system.
According to Baldwin, Taglioni (2002),
disequilibrium exchange rate values have been
44
conclusively shown to have negative link with trade
(see inter alia, European Commission, 1995). Some
authors, however, argued that under the existence of
forward exchange markets, exchange rate uncertainty
can be completely covered so that there is no impact
of exchange rate uncertainty on trade ( Baron, 1976).
Conversely, Viaene & de Vries (1992) argued that
even under the forward exchange markets there may
be an indirect effect of exchange rate volatility on
trade if hedging is costly.
Determinants of Nigerias Foreign Exchange Rate
Volatility
Exchange rate movements and exchange rate
uncertainty are important determinants of
international transactions. In Nigeria, these
fluctuations according to Omojimite & Akpokodje
(2010) have been influenced by changing pattern of
international trade, institutional changes in the
economy and structural shifts in production.
Additionally, Ogunleye (2010) noted that the real
exchange rate in Nigeria has been principally
influenced by external shocks resulting from the
vagaries of world price of agricultural commodities
and oil price; both are main sources of Nigerian
export and foreign exchange earrings. When the
economy depended on agricultural exports, real
exchange rate volatility was less pronounced given
the fact that these products were subject to less
volatility and that there were more trading partners
currencies involved in the calculation of the countrys
real exchange rate. This to Ogunleye minimally
affected the real exchange rate fluctuating by only
0.14 % between 1970 and 1977. The increased
dependence of the country on oil, resulted in severe
trade shocks from global oil price stocks fluctuating
the naira exchange rate by 10% between 1978-1985
(Ogunleye, 2010).
To Iyoha and Oriakhi (2002), movements in real
exchange rate during this period were nominal stocks
resulting from fiscal deficits. Similarly, Ogunleye
(2008) earlier wrote that the oil windfall resulted in
excessive fiscal expenditure in ambitious
development projects; and when the windfall ended,
the government resorted to financing its expenditures
through money creation. Thus, this expansionary
monetary fiscal policy according to him exerted
upward pressure on inflation, aggravated sharp
movements in real exchange rate movements. From
1986, the adoption of the structural adjustment
program (SAP) became a contributory factor in
shaping the dynamics of real exchange rate in
Nigeria. One of the cardinal points of this policy was
floating nominal exchange rate policy. As the naira
was allowed to float, the nominal exchange rate
movement became more pronounced, contributing to
stronger movements in exchange rate during this
period. While, between 1986 and 1992, Ogunleye
(2010) observed that the mean annual charge in real
Journal of Emerging Trends in Economics and Management Sciences (JETEMS) 4(1):42-53 (ISSN:2141-7024)
exchange rate in the country increased to 25%. This
subsequently reduced to 4.5% between 2000 and
2006. Therefore, favourable terms of trade, less fiscal
dominance, effective monetary policy induced by
more independent and transparent central bank and
well managed nominal exchange rate policy
contributed to this decline in foreign exchange rate
volatility.
Foreign Exchange Rate Volatility, Export
Performance and Economic Growth
Foreign exchange fluctuations whether positive or
negative are not desirable to producers of export
products as it has been found to increase risk and
uncertainty in international transactions which
discourages trade (Adubi and Okunmadewa, 1999).
Findings by the IMF (1984) revealed that these
fluctuations induce undesirable macroeconomic
phenomena called inflation. Similarly, Caballero and
Corbo (1989) observed positive effect of exchange
rate fluctuations on export trade in European Union
countries. Accordingly, Walsh and Yu (2010) noted
that low exchange rate favour the importation of
productions machinery, and production and export in
periods of high foreign exchange rate. Lama and
Medina (2010) opined that different open economies
experience different episodes of exchange rate
appreciation in response to different types of stocks,
contending that an appreciation in exchange rate
induces a contraction of the exporting manufacturing
sector. Maintenance of export performance to them
require the depreciation of the real exchange rate of a
countrys currency, the achievable through monetary
injections; noting that a policy of exchange rate
depreciation can successfully prevent a contraction of
export output, having an allocative effect in the
economy.
Moreover, Adubi and Okunmadewa (1999) posited
that Nigeria, a developing nation, is expected to gain
from export conversion price increase as a result of
currency devaluation. Findings by Obadan (1994)
and Osuntogun, et al (1993) on the effect of stable
exchange on export performance showed that
exchange rate affect a countrys export performance.
In addition, instability in an exchange rate with its
attendant risk affect exports earnings, performance
and growth which turn out as positive to exporters
when devalued. Poor results from the floating
exchange regimes of the 1970s necessitated a change
in foreign exchange rate management. The structural
adjustment program was introduced in 1986 with the
cardinal objective of restructuring the production
base of the economy with a positive bias for
agricultural export production. This reform facilitated
the continued devaluation of the Nigerian naira with
the expected increase in domestic prices of
agricultural export boasting domestic production.
45
Thus, Srour (2006) asserted that, diversification of
countries export base is one reason given by
developing nations for changing foreign exchange
rates and regimes. In the same vein, the World Trade
Organization (2010) wrote that, diversification
increases local production, employment, income and
economic growth. In different works, Chukwu (2007)
and Adubi & Okunmadewa (1999) concluded that
foreign exchange rate is a determinant of export trade
and economic growth in Nigeria. Similarly, Lama &
Medina (2010) observed a coincidence in exchange
rate appreciation with a contraction of 3% in the
countrys gross domestic product in the
manufacturing sector; with a 2% average decline in
manufacturing GDP over a 20 year period
characterized foreign exchange rate appreciation.
Although, carrying attendant risks, foreign exchange
rate movement are monetary policy instruments to
achieve export growth, economic growth and
development of any nation.
Empirical Framework
Empirical studies in the past that applied time series
analysis and found no significant relationship
between volatility and trade. The few that found a
link suggest that the effect was very small (see Koray
and Lastrapes (1989), Bini-Smaghi (1991). Meese
and Rogoff (1983), in a work which predates the
cointegration literature, forecast exchange rates by
simply regressing the exchange rate on the
macroeconomic fundamentals and then using these
parameter estimates and the ex post realized and
revised values of the future economic fundamentals
to predict the future exchange rate. Cross-sectional
studies were also carried out by Hooper etal (1978),
Brada and Mndez (1988), and Eichengreen and
Irwin (1995) find evidence of a negative effect of
exchange rate uncertainty on export. Again, this
effect, in most cases, was relatively small. Some
studies employed co-integration analysis, for
example, Koray and Lastrapes (1989), Arize (1997,
1998a and b), Fountas and Aristotelous (1999) and
Flam and Jansson (2000). A detailed empirical
review of this strand of literature is reported in
Baldwin, Skudenly and Taglioni (2005). The results
of the studies taking into consideration the trend
characteristics of the time-series appeared to be more
clear-cut and most suggest a significant negative
effectof exchange rate uncertainty on the trade
variables. For instance, Fountas and Aristotelous
(1999) found a significant negative long run effect of
exchange rate uncertainty on trade. Wei (1999) found
a negative and statistically significant effect for
foreign exchange rate volatility on exports taking
account of futures and options instruments to hedge
risk. Recently, Baum et al (2004) showed evidence of
a positive relationship between exchange rate
volatility and trade using a poisson flexible lag
structure, while Klaassen (2004) did not find
evidence of any significant effect of exchange rate
Journal of Emerging Trends in Economics and Management Sciences (JETEMS) 4(1):42-53 (ISSN:2141-7024)
volatility on trade for G7 economies. Caporale and
Doroodian (1994) used a generalized autoregressive
conditional heteroskedasticity (GARCH) technique to
measure the volatility of exchange rate and
discovered significant negative effect of volatility on
import trade. McKenzie and Brooks (1997) and
McKenzie (1999) used ARCH modeling and
introduced an exchange rate volatility term into their
export trade models for both German-US and
Australian trade flows respectively. Their results
were statistically significant but, showed positive
impact of volatility on trade, while for McKenzie
(1999), the results were mixed.
Furthermore, studies that employed panel estimation
techniques, according to Anderton and Skudelny
(2001) emerge with better results. For example,
Abrams (1980), Thursby and Thursby (1987),
DellAriccia (1998), Pugh, et al (1999) and Rose
(1999), all found significant negative effect of the
proxy for exchange rate uncertainty. In particular,
while DellAriccia (1998) found that the trade gains
resulting from the elimination of exchange rate
volatility would have been 10 percent. Anderson and
Skudelny (2005) discovered that exchange rate
volatility would decrease extra-euro area imports by
around 10 percent.
Another strand of empirical studies apply gravity-
type trade model to assess the impact of exchange
rate volatility on bilateral trade. Pugh, et al (1999)
use 16 OECD countries and showed that volatility
leads to a once and for all decrease in the level of
trade by around 8 percent and Rose (2000) estimated
a gravity trade model for 186 countries using a 5-year
moving average of the variance of the nominal
exchange rate return and discovers that exchange rate
volatility has a significant negative impact on trade
(estimates show that zero exchange rate volatility
would have resulted in a 13 percent increase in trade).
It was this seminal work (Rose (2000)) that started
the debate that countries participating in a currency
union seemed to trade three times more than expected
even when one controls for the impact of exchange
rate volatility. This discovery was christened the Rose
effect. Rose and Engel (2002) and Glick and Rose
(2002) found empirical evidence in support of the
Rose effect. Furthermore, Aliyu (2007a) uses a
gravitational model for Nigeria-India bilateral trade
and discovered that the exchange rate coefficient is
theoretically consistent and statistically significant in
the import model for the Indian economy but not for
the Nigerian economy.
A number of empirical studies on Nigeria were
carried out by Ojo, et al (1978), Osagie (1985), and
all downplayed the role of exchange rate in the
import-export trade in the country. This was largely
possible in view of the system of exchange rate
regime prior to the introduction of structural
46
adjustment programme in Nigeria in July 1986.
However, Omolola (1992), Akanji (1992), Ihimodu
(1993) Osuntogun, et al (1993) World Bank (1994),
Aliyu (1994 & 2001) discovered that exchange rate
depreciation caused significant changes in the
structure and volume of Nigerias agricultural
exports. Egwaikhide (1999) in his dynamic
specification model of import determinants in Nigeria
from 1953 to 1989 discovered that short run changes
in the availability of foreign exchange earnings,
relative prices, and real output (income), significantly
explained the growth in total imports in Nigeria. On
exchange rate instability, Nnanna (2002) links
exchange rate instability in Nigeria to adverse
monetary policy outcome, inflation, interest rate and
growth in money supply; and the failure of monetary
policy was linked to fiscal dominance in the
economy. Aliyu (2007b) showed that exchange rate
significantly affects imports more than exports due
largely to the monocultural nature of Nigerias
exports and inexhaustible and multifarious nature of
its imports. According to a study by the CBN (2008)
using fundamental variables; TOT, nominal effective
exchange rate (NEER) and lagged real exchange rate;
findings suggest that the three variables accounted for
22, 55 and 99 percent of variations in the dependent
variable, respectively.
Theoretically, the volatility-trade link is ambiguous
according to Baldwin, Skudelny and Taglioni (2005).
Dornbusch (1987) observed that the effect of an
appreciated exchange rate on trade would be to make
production of tradable unprofitable and non-tradable
goods more profitable. In other words, imports will
be high, while exports will tend to be discouraged.
Cottani, et al (1990) found that misalignment was
strongly related to lower per capita GDP growth, and
to low productivity, slow export growth and slow
agricultural growth.
It is evident from the above review that studies on the
impact of exchange rate volatility on trade have no
dominant approach. The choice of a particular
approach or methodology and expected outcomes
depend on a particular economy and nature and
availability of data. Gala and Claudio (2006) state
that two main methods of dealing with exchange rate
misalignment are the purchasing power parity (PPP)
approach and fundamental analysis. The PPP
approach, on one hand, is based on relative prices and
considers high international price levels as proxy for
exchange rate overvaluation for a given GDP per
capita level. Fundamental analysis, on the other hand,
considers economic fundamentals in modeling
exchange rate misalignment. These include terms of
trade (TOT), balance of payments (BOP) financing
condition, fiscal policy stance (surplus or deficit
spending), degree of openness (OPN), GDP per
capita, etc. It has also been established in the
literature that a drop in exchange rate volatility can
Journal of Emerging Trends in Economics and Management Sciences (JETEMS) 4(1):42-53 (ISSN:2141-7024)
increase the volume of trade in two not mutually
exclusive ways by producing more exports, and by
increasing the number of firms that are engaged in
exporting. It is this theorization that accounts for a
negative volatility-trade link, Baldwin, Skudelny and
Taglioni (2005). Generally, the transmission
mechanism through which exchange rate volatility
affects non-oil exports in Nigeria could be both from
the supply and demand channels. The supply side
effects are related to the fact that exchange rate
volatility could affect input prices. This induces some
producers to lower output and in the face of volatile
exchange rate, makes the exports less competitive.
Exchange rate volatility could also affect consumer
confidence in importing countries and thus lowers
demand. It also adversely affects investment
indirectly by increasing producers cost. Against this
background, this paper seeks to assess the link
between exchange rate and export trade performance
in Nigeria. Empirical findings by Osuntogun, et al
(1993), Ihimodu (1993) reveal changes in both
structure and volume of Nigerias trade as a result of
the devaluation of naira.
METHODOLOGY
This research will make use of econometric
procedure in estimating the relationship between the
variables in question. The ordinary Least Square
(OLS) technique will be employed in obtaining the
numerical estimates of the coefficients of the
equation, Argumented Dicky-Fuller (ADF) test of
stationarity would be adopted after which Granger
causality test can be used to determine the causation
between export and exchange rate, afterward ARCH
and GARCH techniques can be applied to test the
volatility of the data. In demonstrating the application
of ordinary least square method, the simple linear
regression analysis is used with the export and
exchange rate, as the relevant variables. The
independent variable is exchange rate while the
export is the dependent variable. Justification for the
selection of these methods is that the data is a time
series data and all-time series data exhibit a random
walk.
Model Specification
The export demand function which on apriori
grounds is influenced by a number of factors such as
relative prices is presented as follows:
Model I (OLS)
EXPORT = a0 + a1 EXCR + et (i)
EXPORT is defined as the volume of export, EXCR
is denoted as the exchange rate, a0 and a1 are
parameters, et is error term (white noise) and
normally distributed. Model I depicts that export
demand function depends on relative prices. Thus,
theoretically it is expected that a0 and a1 > 0. Hence,
export would be cheaper as exchange rate increases
as result of depreciation in the value of the domestic
currency.
47
Model II (ARCH and GARCH)
EXPORTt = a0 + a1 EXPORTt-1 + et (i)
2
t = 1 + 1t-1 + 2 t-12 (ii)
EXCRt = a2 + a3 EXCRt-1 + et (iii)
2
t = 2 + B3t-1 + B4 t-12 (iv)
Where; 1 and 2 is defined as the constant, 1, 2, 3
and 4 are ARCH and GARCH coefficients, 1t-1 is
ARCH term, 2 t-12 is GARCH term. It is expected
that 1 + 2 < 1 and 3 + 4 > 1. The export is expected
to be stable and not volatile on apriori grounds, while
exchange rate is expected to be volatile.
Model III (CAUSALITY)
The model of causality test is thus specified as
follows:
EXPORT = i EXCRt-1 + j EXPORTt-1 + t1 (i)
EXCR = i EXCRt-1 + j EXPORTt-1 + t2 (ii)
From model III, it is expected that i= 0, j 0, i =
0 and j 0. ( i and i are expected to be
statistically insignificant whereas j and j are
expected to be statistically significant. However, if
the estimates of the parameter turn up with signs or
size not conforming to economic theory, they should
be rejected, unless there is a good reason to believe
that in the particular instance, the principles of
economic theory do not hold.
RESULTS AND DISCUSSION
The results of model I, is presented in Table 1, which
contains bivariate regression results for the
relationship between export and exchange rate. The
results indicated that the coefficient of exchange rate
is statistically significant. Precisely, the coefficient of
exchange rate is found to be statistically significant at
1 percent level as indicated by its probability value
0.0000 and rightly signed (positive). This therefore,
implies that 1 unit increase in exchange rate would
increase by 44361.49 units. The constant term is
found to be statistically insignificant, indicated by its
high probability value 0.5615, which implies that the
constant is not significant at 56 percent. The F-
statistics value 96.4260, which is the measure of the
joint significance of the parameters, is found to be
statistically significant at 1 percent level as indicated
by the corresponding probability value 0.000000.
Though export of a country does not only depends on
the exchange rate along but to some extent on the
elasticity of demand for a countrys export in the
world market. Given the regression equation:
EXPORT = -172637.7 + 294739.1EXCR
The mean of export is 1535304 and the mean of
exchange rate is 38.5005. The regression result
revealed that, the elasticity of demand for Nigerias
export is (294739.1 X 38.5005)/1535304 =
11347602.72/1535304 = 7.3911. This indicated that,
the elasticity of demand for the Nigerian product in
Journal of Emerging Trends in Economics and Management Sciences (JETEMS) 4(1):42-53 (ISSN:2141-7024)
the world market is fairly elastic; therefore
depreciation in naira value (reduction) in the prices of
Nigerias product. The R2 square value 0.71 which
implies that 71 percent total variation in export is
explained by the regression equation. Coincidentally,
the goodness of fit of the regression remained high
after adjusting for degree of freedom as indicated by
the adjusted R2 square is 70. Durbin Watson statistic
is 0.347156 in Table 1, is found to be less than R2
value 0.71 indicating that the model is spurious.
Durbin Watson statistic is very low indicating the
presence of autocorrelation; therefore, the unit root
test became important to make the data to be
stationary.
The results of unit root test are contained in Table 2,
and 3 in the Appendix. The results revealed that all
the variables of the model are found to be stationary
at both 1 percent, 5 percent and 10 percent level with
first difference (d(1)), which is indicated by ADF
results at all levels less than the critical values in
negative direction. The ADF value for EXPORT is -
4.1602 and the critical values are -3.6156, -2.9412
and -2.6091 at 1, 5, and 10 percent respectively. The
ADF value for EXCR is -5.2430 and the critical
values are -3.6156, -2.9412, and -2.6091.
The results of causality are contained in Table 4 in
the Appendix. The results revealed that EXPORT
does not granger causes EXCR, the null hypothesis is
accepted at 92 percent indicated by the high
probability value 0.9212. The results also revealed
that EXCR Granger causes EXPORT, the null
hypothesis is rejected at 1 percent indicated by the
probability value 0.0002 and this is confirmed by the
F-statistics value 17.0752. This result therefore,
indicates one-way causation flowing from EXCR
(exchange rate) to EXPORT (volume of export). This
results shows that exchange rate causes export and
not the other way round.
The ARCH and GARCH results contain in Table 5,
6, and 7 in the Appendix which reveals that the time
series data under consideration is volatile. This is
indicated by the sum of the ARCH and GARCH
coefficient in Table 5 (2.404933 -- 0.847271 =
1.5577). This result shows that there is high volatility
clustering in the data. The ARCH and GARCH
results for EXPORT is contain in Table 6; this result
indicated that export data in Nigeria is not volatile as
in indicated by the sum of the ARCH and GARCH
coefficient (1.506505 - 0.995383 = 0.511122). The
ARCH and GARCH results for EXCR is contain in
Table 7; the result indicated that exchange rate in
Nigeria is highly volatile as indicated by the sum of
the ARCH and GARCH coefficient (2.208021 -
0.034864 = 2.173157). The autoregressive
conditional heteroscedasticity and generalized
autoregressive conditional heteroscedasticity results
above revealed that exchange rate in Nigeria is highly
48
volatile and is impacting positively on the export of
the country.
CONCLUDING REMARKS
This paper investigates the impact of exchange rate
volatility on export in Nigeria from 1970-2009 using
the applied of ADF technique in testing the unit root
property of the series, the Granger causality test for
causation was conducted, ARCH and GARCH
techniques were tested to see the presence of
volatility in the series. The results of unit root
suggested that all the variables in the model are
stationary at first difference, the results of causality
showed that there is causation between export and
exchange rate in Nigeria, but the causation flows
from exchange rate to export (i.e. exchange rate
granger causes export), and ARCH and GARCH
results revealed that the data is volatile, especially the
exchange rate is volatile nevertheless export is found
to be non-volatile. The results also discovered that
when exchange rate is increased by 1 unit export
increase by 44361.49 units. Thus, exchange rate is
impacting positively on export trade in Nigeria as
shown by the regression results.
The elasticity results indicated that, the demand for
the Nigerian products in the World market is fairly
elastic. Consequently, for export to improve and
foreign exchange earnings to increase, the country
should change the course of export drive from
import-led to export-led economy so as to devalue its
currency appropriately, thereby reducing the price of
its products and increasing demand.
The paper recommends the pursuance of a stable and
sustainable exchange rate policy and to put in place,
measures that will promote greater exchange rate
stability and improve conditions of terms of trade,
promote greater openness of the economy in order to
enhance non-oil exports. There is the need for the
government to devalue its currency after changing the
courses of trade export volume, other vital factors
are; efficient delivery of services, infrastructure,
power supply and other energy resources. It is hoped
that coming up with the above measures could
greatly promote more export trade.
Lastly, the paper is not without limitations, therefore
the shortcomings of the methodologies and sources of
data are in a way the research limitations. It is
important to assert that a major limitation to this
study is the extent of accuracy of information and
data that documents the manifestations of export
trade and exchange rate in Nigeria.
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Journal of Emerging Trends in Economics and Management Sciences (JETEMS) 4(1):42-53 (ISSN:2141-7024)

APPENDIX
TABLE 1: REGRESSION RESULTS
Dependent Variable: EXPORT TABLE 2: UNIT ROOT TEST FOR EXPORT
Method: Least Squares Null Hypothesis: D(EXPORT) has a unit root
Date: 06/17/12 Time: 14:07 Exogenous: Constant
Sample: 1970 2009 Lag Length: 0 (Automatic - based on SIC, maxlag=1)
Included observations: 40
t-Statistic Prob.*
Variable Coefficient Std. Error t-Statistic Prob.
Augmented Dickey-Fuller test statistic -4.160231 0.0023
C -172637.7 294739.1 -0.585731 0.5615 Test critical values: 1% level -3.615588
EXCR 44361.49 4517.614 9.819673 0.0000 5% level -2.941145
10% level -2.609066
R-squared 0.717317 Mean dependent var 1535304.
Adjusted R-
squared 0.709877 S.D. dependent var 2793969.
S.E. of regression 1504916. Akaike info criterion 31.33508
Sum squared TABLE 4: GRANGER CAUSALITY TEST
resid 8.61E+13 Schwarz criterion 31.41952 Pairwise Granger Causality Tests
Log likelihood -624.7016 Hannan-Quinn criter. 31.36561 Date: 06/17/12 Time: 14:17
F-statistic 96.42597 Durbin-Watson stat 0.347156 Sample: 1970 2009
Prob(F-statistic) 0.000000 Lags: 1

Null Hypothesis: Obs F-Statistic Prob.

TABLE 3: UNIT ROOT TEST FOR EXCR
EXCR does not Granger Cause
Null Hypothesis: D(EXCR) has a unit root EXPORT 39 17.0752 0.0002
Exogenous: Constant EXPORT does not Granger Cause EXCR 0.00993 0.9212
Lag Length: 0 (Automatic - based on SIC, maxlag=1)
*MacKinnon (1996) one-sided p-values.
t-Statistic Prob.* TABLE 5: ARGH/GARCH RESULTS
Dependent Variable: EXPORT
Augmented Dickey-Fuller test statistic -5.242948 0.0001
Method: ML - ARCH (Marquardt) - Normal distribution
Test critical values: 1% level -3.615588
Date: 06/17/12 Time: 14:23
5% level -2.941145
Sample: 1970 2009
10% level -2.609066 Included observations: 40
Convergence achieved after 297 iterations
*MacKinnon (1996) one-sided p-values. Presample variance: backcast (parameter = 0.7)
GARCH = C(3) + C(4)*RESID(-1)^2 + C(5)*GARCH(-1)
TABLE 6: ARCH/GARCH FOR
EXPORT
Dependent Variable: EXPORT Variable Coefficient Std. Error z-Statistic Prob.
Method: ML - ARCH (Marquardt) - Normal distribution
Date: 06/17/12 Time: 14:27 C -58136.64 272361.9 -0.213454 0.8310
Sample: 1970 2009 EXCR 55607.08 2928.957 18.98528 0.0000
Included observations: 40
Convergence achieved after 30 iterations Variance Equation
Presample variance: backcast (parameter = 0.7)
GARCH = C(1) + C(2)*RESID(-1)^2 + C(3)*GARCH(-1) C 1.40E+12 5.90E+11 2.369229 0.0178
RESID(-1)^2 2.404933 0.685793 3.506791 0.0005
Variable Coefficient Std. Error z-Statistic Prob. GARCH(-1) -0.847271 0.035510 -23.86037 0.0000

Variance Equation R-squared 0.631842 Mean dependent var 1535304.

Adjusted R-
squared 0.622153 S.D. dependent var 2793969.
C 6.48E+12 3.31E+12 1.955077 0.0506
S.E. of
RESID(-1)^2 1.506505 0.847894 1.776761 0.0756 regression 1717431. Akaike info criterion 30.57936
GARCH(-1) -0.995383 0.002863 -347.7060 0.0000 Sum squared
resid 1.12E+14 Schwarz criterion 30.79047
R-squared -0.309700 Mean dependent var 1535304. Log likelihood -606.5872 Hannan-Quinn criter. 30.65569
Adjusted R- Durbin-Watson
squared -0.276957 S.D. dependent var 2793969. stat 0.330580
S.E. of
regression 3157256. Akaike info criterion 31.04239
Sum squared3.99E+14 Schwarz criterion 31.16906

52
Journal of Emerging Trends in Economics and Management Sciences (JETEMS) 4(1):42-53 (ISSN:2141-7024)

TABLE 7: ARCH/GARCH RESULTS FOR EXCR

Dependent Variable: EXCR

Method: ML - ARCH (Marquardt) - Normal distribution
Date: 06/17/12 Time: 14:31
Sample: 1970 2009
Included observations: 40
Convergence achieved after 62 iterations
Presample variance: backcast (parameter = 0.7)
GARCH = C(1) + C(2)*RESID(-1)^2 + C(3)*GARCH(-1)

Variable Coefficient Std. Error z-Statistic Prob.

Variance Equation

C -0.409812 0.925481 -0.442810 0.6579

RESID(-1)^2 2.208021 3.129450 0.705562 0.4805
GARCH(-1) -0.034864 1.506335 -0.023145 0.9815

R-squared -0.534303 Mean dependent var 38.50054

Adjusted R-squared -0.495945 S.D. dependent var 53.34220
S.E. of regression 65.24222 Akaike info criterion 7.138150
Sum squared resid 170261.9 Schwarz criterion 7.264816
Log likelihood -139.7630 Hannan-Quinn criter. 7.183949
Durbin-Watson stat 0.037929

resid
Log likelihood -617.8479 Hannan-Quinn criter. 31.08819
Durbin-Watson
stat 0.043889

53