IMPACT OF MONETARY AND EXCHANGE RATE POLICIES ON TRADE BALANCE IN NIGERIA

Abstract

The balance of trade measures the difference between a country's exports and imports. A trade 
surplus occurs when exports exceed imports, while a trade deficit happens when imports 
surpass exports. This research explores how monetary and exchange rate policies affect the 
balance of trade, using various macroeconomic theories such as monetary approach and 
purchasing power parity. Analyzing time series data from 1981 to 2023, the study examines 
factors like trade balance, monetary policy rate, real exchange rates, consumer price index, 
world oil price, investment, GDP, and trade openness. The ARDL model was used to evaluate 
both the short-run and long-term co-integration of these variables. Results show that, in the 
short term, the monetary policy rate and real exchange rate do not significantly impact Nigeria's 
oil or non-oil sectors or overall trade balance. However, in the long term, both have a significant 
relationship with Nigeria's trade balance. The study suggests that monetary authorities maintain 
lending interest rates for foreign traders at a single-digit level to improve accessibility and 
sustainability, thus enhancing international trade and the Federal Government, through the 
Central Bank of Nigeria, should work to stabilize the foreign exchange market to reduce 
fluctuations in the nominal effective exchange rate.