A STUDY OF NIGERIAN BALANCE OF TRADE: CO-INTEGRATED VAR MODEL APPROACH

ABSTRACT

The impactof exchange rate, money supply, Gross Domestic Product and Foreign Direct Investimenton trade balance has been at the center of literature debate over time with varying empirical evidences for different countries.This researchis an empirical investigation of the impact of exchange rate (EXR), money supply(M2), gross domestic product (GDP) and foreign direct investment (FDI) on Nigerian trade balance using the Johansen co-integration and variance decomposition analysis using annual time series data from 1981 to 2016; The empirical results indicate that there exist a long-run relationship between trade balance and its determinant- M2, EXR, GDP and FDI; as employed in the study. On the variance decomposition analyses the percentage of the forecast variance in trade balance is largely explained by innovation in M2 and GDP,as they maintain higher percentage than EXRand FDI. The research concludes with important implications for policy makers because it provides evidence supporting that fact that all the variables havesignificant impact on trade balance adjustment and that appreciation of the exchange rate worsens the trade balance of Nigeria in the long run.