Abstract:
This study empirically examined the effect of real exchange rate volatility on balance of payments in Nigeria from 1970q1-2015q4 using the Ordinary Least Squares (OLS) technique. Autoregressive-Exponential Generalized Autoregressive Conditional Heteroskedasticity (AR-EGARCH) model was estimated to examine the real exchange rate for volatility by obtaining the conditional variance from the estimated result, which was used to proxy exchange rate volatility. Empirical results showed that real exchange rate volatility had a positive and insignificant effect on the current account of balance of payments. Also, real exchange rate volatility had positive and insignificant effect on the capital account of balance of payments. It was also found that real exchange rate volatility had negative and insignificant effect on the financial account of balance of payments. The results also showed that the Marshall-Lerner condition does not hold for Nigeria. On the basis of the above, the study recommended that currency devaluation (or depreciation) should not be seen as a major policy option to maintain the exchange .rate volatility at a rate that allows adjustment of the balance of payments. Ban on some of the goods that have high degree of importation such as the ban on foreign rice could go a long way to reduce importation expenditure, boost local production in quantity and quality and could be an appropriate complement to devaluation.
