MONETARY POLICY, EXCHANGE RATE AND TRADE BALANCE IN NIGERIA

ABSTRACT

This research sought to investigate the interrelationship among monetary policy, exchange rate and trade balance in Nigeria. The study used time series data sourced from the Central Bank of Nigeria (CBN) Statistical Bulletin, 2021; the National Bureau of Statistics, 2021; and Ministry of Finance, Budget and National Planning, 2022 for the period, 1981 to 2021. The study adopted the correlation analysis, Augmented Dickey Fuller unit root tests, Johansen cointegration test and the Vector Error Correction modeling technique. The research findings revealed that there is a co-integration among balance of trade, money supply and exchange rate. It was also revealed that unanticipated money supply shock has an adverse effect on the balance of trade position in Nigeria. Again, it was found that the effect of exchange rate innovations on trade balance is nontransitory. It was discovered that exchange rate had a positive and significant impact on balance of trade in the long run. However, in the short run, the results show that exchange rate has positive and insignificant effects on balance of trade. Furthermore, it was found that money supply negatively and significantly induces balance of trade in the long run though insignificant in the short-run. Interest rate was found to have a significant positive effect on balance of trade in the long run. Credit to the core private sector was found to have a negative and significant effect on balance of trade in the long term. Thus, the study recommends that the government should encourage the production of most of the imported goods in the country by the local industries to ameliorate the adverse effect of expansionary monetary policy on the trade balance. Also, there is need for effective exchange rate management by the monetary authority to yield a favourable balance of trade. Again, Nigeria should diversify its export base by including manufactured goods alongside the primary products. This will boost foreign investment that will be geared towards production of multi-sectored tradable goods for foreign exchange.