Terms of trade instability and balance of payments adjustment in Nigeria: A simultaneous equation modelling
This paper employs simultaneous equation modeling to test the hypothesis that impact of terms of trade instability has no significant impact on Nigeria.s balance of payments position. Empirical evidence reveals that BOP has negative relationship with terms of trade. This implies that for any 1percent instability (shock) in terms of trade, balance of payment will be adversely affected by about 1.8 percent. Hence it becomes pertinent for policy makers to pursue policies that will stabilize terms of trade. The study also invalidates the Marshal-learner condition. Hence, caution should not be thrown to the wind in adopting the policy of deliberately depreciating the naira especially because of the peculiarity of the country.s exports and imports. Indeed, evidence thus abound that it is not enough to increase exports rather the export basket should be diversified. The negative association between inflation and BOP should be a source of worry to policy makers. It is therefore imperative for economy to address exchange control problems to the effect that the naira does not depreciate beneath a managed floor value.
Key Words: Terms of trade instability, Balance of payments adjustment, Nigeria
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