MONETARY POLICY RATE ON TRADE BALANCE IN NIGERIA

Abstract

Numerous studies have examined the relationship between money supply, exchange rates, and trade balance. However, there is a lack of research in Nigeria specifically focusing on the impact of monetary policy rate on trade balance. Therefore, the objective of this study is to investigate the effect of monetary policy rate on Nigeria's trade balance. Drawing upon the absolute cost advantage theory of trade as the theoretical framework, this study utilized time series data from 1981 to 2022 and incorporated various variables such as trade balance (export-import), monetary policy rate, real exchange rates, real gross domestic product, crude oil price, interest rate, and foreign direct investment. To assess the long-term co-integration of these variables, the study employed the auto-regressive distributed lag (ARDL) model. The findings indicate that in the short run, monetary policy rate does not exert a significant influence on Nigeria's trade balance. However, in the long run, both variables demonstrate a significant impact. Consequently, the study concludes that monetary policy rate plays a crucial role in shaping the trade balance and suggests that the government should promote exports by reducing the impact of monetary policy rate, which could lead to a decrease in interest rates. This, in turn, would contribute to a surplus in the trade balance and foster economic growth within the country.