Interaction Effects Of Monetary And Exchange Rate Policies On Oil And Non-Oil Trade Balance In Nigeria

Abstract

Motivated by persistent imbalances in Nigeria’s external sector, this study examined the interaction effects of monetary and exchange rate policies on oil and non-oil trade balance. The study assessed how these policy instruments jointly influence Nigeria’s trade balance components across sectors using time series data from 1981–2023. The study employed the Autoregressive Distributed Lag (ARDL) model to estimate both the short and long-run relationships, including the interaction effects. The findings revealed that, in the short run, monetary policy rate and interest rate significantly influenced capital and consumer goods trade balance but had no significant effect on oil and non-oil trade balance. In contrast, the real exchange rate significantly affected all trade balance components. In the long run, monetary policy rate, interest rate, and real exchange rate significantly determined trade balance across all the sectors. Furthermore, monetary policy significantly moderates exchange rate effects in non-oil trade, but not in oil trade, while fiscal policy and institutional quality showed no significant moderating influence. Hence, we conclude that coordinated monetary and exchange rate policies are critical for improving trade balance outcomes. Based on the findings, the study recommends maintaining single-digit lending interest rates to enhance access to trade finance and stimulate non-oil export performance. The study also recommends that the Central Bank of Nigeria implement monetary policy easing to lower interest rates and facilitate credit access for businesses, thereby enhancing competitiveness and affecting exchange rates.