EMPIRICAL EVIDENCE OF EXPORT RESPONSES TO EXCHANGE RATE VOLATILITY IN NIGERIA
1.1 Background of the Study
Since the breakdown of the Bretton Woods fixed exchange rate system in the early 1970s, the effect of exchange rate volatility on trade flows and other macroeconomic variables has attracted a lot of attention. Exchange rate is simply the rate at which one currency exchanges for another and its volatility is a statistical measure of the exchange rate tendency to rise and fall sharply within a short period and is important in understanding foreign exchange market behavior. Be it nominal or real exchange rate, volatility creates uncertainty in macroeconomic policy formulation, investment decisions and international trade flows. (Anthony Musonda 2008).
The role of exports in economic development has been widely acknowledged. Exports refer to goods and services a country sends to other countries for sale. It affects the current account balance of an economy positively and its payment involves converting one currency into another via exchange rate. Ideally, export activities stimulate growth in a number of ways including improvement of balance of payment, production and demand linkages, economies of scale due to large international markets, increased efficiency, adoption of superior technologies embodied in foreign produced capital goods, learning effects and improvement of human resources, increased productivity through specialization as well as creation of employment (Maureen Were 2002). According to Giles and Williams (2000), while practical evidence in support of Export Led Growth (ELG) may not be universal, rapid export growth has been important feature of East Asia’s remarkable record of high and sustained growth. In particular, the wave of growth in the four countries (Hong Kong, South Korea, Singapore and Taiwan) and the newly industrialized countries (such as Malaysia, Indonesia and Thailand) has been used to support the argument that carefully managed openness to trade through an export-Led growth is a mechanism for achieving rapid growth.
Exchange rate volatility has acquired a special interest in the research works on international trade and investment. Given the central role of exchange rate in an economy generally, and its importance to investment and international trade in particular, the Nigeria national government has increasingly felt the impact of this volatility on their own policies towards the achievement of macroeconomic objectives. Some of the economic variables often mentioned as being influenced by exchange rate volatility are trade flows, foreign direct investment, currency crisis, debt servicing cost and commodity prices (Okenyi 2010). Exchange rate volatility refers, to the erratic fluctuations in exchange rate which could occur during periods of domestic currency appreciation or depreciation. Much variation in Exchange rate may lead to a major decline in future output if they are unpredictable and erratic. The exchange rate is therefore an important relative price as it has influence on the external competitiveness of the domestic economy.