Exchange Rate Volatility, Trade flows and Economic Growth in a Small Open Economy

Abstract

Unlike previous studies which focused more on the developed and emerging economies, this paper examines the causal relationship between exchange rate volatility (ERV), trade flows and economic growth of the sub-Saharan African countries with exclusive reference to Nigeria which is considered as small open economy. The empirical study is based on a time series data over the period of 1970-2009. We apply new advances in the field of time series econometrics to provide more reliable estimates. The results indicate significant effects of ERV on trade flows and economic growth of Nigeria. The finding support the preference of flexible exchange rate regime over the fixed regime as it facilitates more trade flows in Nigeria. We recommend effective diversification of the Nigeria economy by encouraging more manufacturing firms’ production output sufficient enough to meet the demand of both domestic and regional markets of West Africa follow by full implementation of float exchange rate system by the authority concerned