Asymmetry Behaviour of Real Exchange Rate Volatility and Trade Flows: a Bilateral Analysis

Abstract

Abstract The debate on the effects of exchange rate volatility on trade is still ongoing. This study however focuses on how asymmetry behaviour in bilateral exchange rate influences trade between Nigeria and five of its major trading partners, namely France, US, Netherland, China and India. Data on relevant variables are obtained on monthly basis over the period of 2011:4 to 2020:12. Time varying variance (generalized autoregressive conditional heteroskedasticity – GARCH) is employed to generate the volatility series while nonlinear autoregressive distributed lag (NARDL) in the context of expected utility theory was employed. The NARDL results suggest that there exists both short and long run asymmetry behaviour of most of the bilateral real exchange rates. Specifically, positive change in bilateral real exchange rate volatility enhances exports to all the trading partners except US. Negative change in bilateral real exchange rate volatility facilitates exports to China, India and the US but inhibits exports to France and Netherland. The magnitude of positive change is stronger than the negative change in this regard. Both positive and negative change in bilateral real exchange rate volatility reduces imports from all the trading partners except from India. Following these results, some policy implications and recommendations are drawn. One of such recommendations is that the monetary authorities in Nigeria should expand the number of foreign currency in the basket for settling international transactions. In this regard, Yuan and Rupee are recommended to also be part of the major currencies. JEL Classification: F14, F31, F41