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AN EMPIRICAL ANALYSIS OF REAL EXCHANGE RATE MISALIGNMENT AND EXPORT DIVERSIFICATION IN NIGERIA

AN EMPIRICAL ANALYSIS OF REAL EXCHANGE RATE MISALIGNMENT AND EXPORT DIVERSIFICATION IN NIGERIA

 

Abstract: This paper empirically explores the relationship between real exchange rate misalignment and export diversification in Nigeria over the period 1995q1 to 2014q4. The link between exchange rate misalignment and diversification is highly debated and the empirical evidence highly debated. Based on this lack of consensus, this paper used two different measures of real exchange rate misalignment (fundamental equilibrium exchange rate approach and behavioural equilibrium exchange rate approach) to substantiate the robustness of our conclusion. This paper seeks to contribute to the debate by using the Toda-Yomamato causality and bound testing approach to cointegration. The result of the cointegration test shows evidence of long-run relationship between our variables of interest. The findings show that export diversification Granger-cause exchange rate misalignment, this suggests that export diversification effort could reduce unwarranted movement in real exchange rate, thereby reducing exchange rate misalignment. The result also suggests that there is causality running from misalignment (feer) to export diversification, which provides ample evidence that deliberate effort to alter the equilibrium exchange rate (misalignment) could yield positive result in the export diversification effort. The policy implication of the result is that export diversification is a viable option for Nigeria to reduce unwarranted movement in exchange rate.
JEL Codes: O24, F10, 014

 

 

 

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