THE IMPACT OF EXCHANGE RATE FLUCTUATIONS ON INTERNATIONAL TRADE TRANSACTIONS IN NIGERIA BETWEEN [1980 – 2008]

CHAPTER ONE: INTRODUCTION

1.1 Background of Study

Exchange rate fluctuations represent one of the most significant and pervasive sources of risk and uncertainty affecting international trade transactions in Nigeria, particularly given the country’s heavy dependence on international trade for both export earnings (primarily oil) and import consumption (manufactured goods, machinery, raw materials, refined petroleum products, and food items). The exchange rate—the price of one currency in terms of another—serves as a critical relative price in the international economy, affecting the competitiveness of exports, the cost of imports, the profitability of trade transactions, and the overall balance of payments. For a country like Nigeria, where the economy has historically been dependent on oil exports (accounting for 90-95% of foreign exchange earnings and 70-80% of government revenue during much of the period), exchange rate fluctuations have particularly profound implications for international trade. The period 1980-2008 is especially significant because it encompasses dramatic shifts in Nigeria’s exchange rate policy, from a fixed exchange rate regime to a managed float, and includes major external shocks such as the oil price collapse of the 1980s, the Structural Adjustment Programme (SAP) of 1986, the Gulf War oil price spike of 1990-1991, the Asian financial crisis of 1997-1998, and the commodity price boom of the 2000s (CBN, 2000; Obadan, 2006; Mordi, 2006).

The historical evolution of Nigeria’s exchange rate policy during the 1980-2008 period reflects the country’s changing economic fortunes, policy philosophies, and external constraints. The period began with a fixed exchange rate regime tied to the US dollar, following the breakdown of the Bretton Woods system. Nigeria maintained an overvalued exchange rate during the early 1980s, which contributed to a balance of payments crisis as oil prices collapsed. The Structural Adjustment Programme (SAP) of 1986 marked a watershed in Nigerian exchange rate policy, introducing the Second-Tier Foreign Exchange Market (SFEM) and moving toward a more market-determined exchange rate. The SFEM created a dual exchange rate system, with an official rate for government transactions and a market-determined rate for other transactions. The early 1990s witnessed further liberalisation with the establishment of the Autonomous Foreign Exchange Market (AFEM) in 1992, which was intended to unify the exchange rate. However, policy reversals occurred later in the 1990s, including the re-imposition of exchange controls, the Fixed Exchange Rate System (1995-1999), and the reintroduction of the Dutch Auction System (DAS) in 1999. The period 2000-2008 saw the refinement of the DAS and the introduction of the Wholesale Dutch Auction System (WDAS) in 2006, which increased the role of market forces while still allowing CBN intervention (CBN, 2000; Obadan, 2006; Mordi, 2006; Fashola, 2006).

The relationship between exchange rate fluctuations and international trade has been extensively analysed in the international economics literature. The elasticity approach, rooted in the Marshall-Lerner condition, posits that a depreciation of the domestic currency (increase in the exchange rate, e.g., more naira per US dollar) will improve the trade balance if the sum of the price elasticities of demand for exports and imports exceeds one. The J-curve effect suggests that the trade balance may initially worsen following depreciation (because import prices rise immediately while export volumes adjust slowly) before improving. The absorption approach focuses on the relationship between domestic income, domestic absorption, and the trade balance. The monetary approach links the exchange rate to relative money supplies and interest rates. These theoretical frameworks provide the foundation for understanding how exchange rate fluctuations affect the volume, value, and direction of international trade transactions (Mundell, 1963; Fleming, 1962; Dornbusch, 1976; Krugman, 1978).

In the Nigerian context, the structure of international trade has important implications for how exchange rate fluctuations affect trade transactions. Nigeria’s exports are dominated by oil (crude petroleum), which accounts for over 90% of export earnings. Oil exports are priced in US dollars, so the naira value of oil exports fluctuates with the exchange rate: a depreciation of the naira increases the naira value of oil exports (positive effect on government revenue), but has little effect on the volume of oil exports (which is determined by production quotas, OPEC agreements, and oilfield capacity). Non-oil exports (agricultural products, solid minerals, manufactured goods) are negligible, accounting for less than 5% of export earnings during most of the period. Nigeria’s imports, on the other hand, are highly diversified: machinery and equipment, manufactured goods, refined petroleum products, chemicals, food items, and raw materials. Import demand is relatively inelastic for many goods (e.g., machinery, raw materials needed for production), meaning that depreciation increases the naira cost of imports, which may be passed through to domestic prices (inflation) and reduce real incomes (Odularu, 2008; Adeniyi and Egwaikhide, 2011; Okafor, 2012).

The impact of exchange rate fluctuations on export transactions in Nigeria operates through several channels. The price competitiveness channel: depreciation makes Nigerian exports cheaper in foreign currency, potentially increasing export demand. However, for oil exports (which are homogeneous and priced in US dollars), the price competitiveness channel is irrelevant (oil importers pay the US dollar price regardless of the naira exchange rate). For non-oil exports, depreciation could improve competitiveness, but the non-oil export base is small. The profitability channel: depreciation increases the naira value of export receipts, increasing the profitability of export-oriented firms (if their costs are in naira). This could incentivise export production. The risk channel: exchange rate volatility creates uncertainty about future export receipts, which may discourage investment in export-oriented industries. The forward-looking exporter must estimate future exchange rates to determine whether export production is profitable; high volatility makes this estimation difficult (Arize, Osang, and Slottje, 2000; Bahmani-Oskooee and Fariditavana, 2016; Obadan, 2006).

The impact of exchange rate fluctuations on import transactions in Nigeria is more direct and significant. The price channel: depreciation increases the naira cost of imports, which may be passed through to domestic consumers (inflation) or absorbed by importers (reduced profit margins). For essential imports (machinery, raw materials, pharmaceuticals, refined petroleum), importers may be forced to absorb higher costs, reducing profitability. The volume channel: depreciation increases the price of imported goods, potentially reducing import demand (if demand is elastic). However, demand for many imported goods in Nigeria is inelastic (e.g., machinery, spare parts, refined petroleum), so volume may not adjust much. The balance sheet channel: Nigerian firms with foreign currency-denominated debt (e.g., trade credit denominated in US dollars) face higher debt burdens when the naira depreciates, potentially leading to financial distress. The trade credit channel: foreign suppliers may reduce trade credit (extend less credit, shorten payment terms) in response to exchange rate volatility, increasing the working capital requirements of Nigerian importers (Agénor and Montiel, 1996; CBN, 2010; Obadan, 2006).

The period 1980-2008 witnessed several major exchange rate shocks that had significant impacts on international trade transactions. The oil price collapse of the 1980s led to a balance of payments crisis, forcing Nigeria to devalue the naira and adopt SAP. The devaluation (depreciation) increased the naira cost of imports, contributing to high inflation (which averaged 20-30% in the late 1980s and early 1990s). The Gulf War (1990-1991) led to an oil price spike, increasing Nigeria’s export earnings and allowing the CBN to appreciate the naira (reduce the exchange rate). The appreciation made imports cheaper, reducing inflation and increasing import volumes. The Asian financial crisis (1997-1998) reduced global demand for oil, reducing Nigeria’s export earnings and putting pressure on the naira to depreciate. The commodity price boom (2000-2008) led to high oil prices, increasing export earnings, building foreign exchange reserves, and allowing the CBN to keep the naira relatively stable. The global financial crisis began at the end of 2008 (after our study period), but its effects on exchange rates and trade are excluded (CBN, 2000; Sanusi, 2010; Okonjo-Iweala, 2012).

The institutional framework for managing exchange rates and international trade in Nigeria involves multiple actors. The Central Bank of Nigeria (CBN) is responsible for exchange rate policy, foreign exchange market management, and international reserves management. The CBN conducts foreign exchange auctions, intervenes in the interbank market, sets official exchange rates, and manages the parallel market (which has existed throughout much of the period). The Federal Ministry of Finance is responsible for trade policy (tariffs, quotas, import bans, export promotion). The Nigeria Customs Service collects import duties and monitors trade flows. The National Bureau of Statistics (NBS) compiles trade statistics (exports, imports, balance of payments). The Nigerian Export Promotion Council (NEPC) promotes non-oil exports. The effectiveness of these institutions in managing exchange rate fluctuations and supporting international trade has varied over the period (CBN, 2000; Obadan, 2006; Mordi, 2006).

The parallel (black) market for foreign exchange has been a persistent feature of the Nigerian economy throughout the 1980-2008 period, coexisting with official exchange rate windows. The parallel market emerged because official exchange rates were often overvalued (especially during the fixed exchange rate periods), leading to excess demand for foreign exchange that could not be met through official channels. The parallel market premium (the difference between the parallel market rate and the official rate) serves as an indicator of exchange rate pressure, policy credibility, and the effectiveness of exchange controls. During periods of high premium (e.g., the fixed exchange rate period of 1995-1999), importers faced higher costs if they had to source foreign exchange from the parallel market, distorting trade transactions. The parallel market also affects trade through its impact on inflation expectations, capital flight, and informal sector imports (Obadan, 1994; Mordi, 2006; Okafor, 2012).

The measurement of exchange rate fluctuations can be approached through several indicators. The nominal exchange rate (NER) is the price of one currency in terms of another (e.g., naira per US dollar). The real exchange rate (RER) adjusts the nominal exchange rate for relative price levels (domestic price level relative to foreign price level), providing a measure of competitiveness. An increase in the RER (real depreciation) indicates improved competitiveness (domestic goods are cheaper relative to foreign goods). The real exchange rate volatility (standard deviation of RER changes) measures exchange rate risk. Trade flows (exports, imports, trade balance) are measured in both naira and US dollar terms to assess the impact of exchange rate movements. The period 1980-2008 provides a rich dataset for analysing the relationship between exchange rate fluctuations and international trade transactions (Obadan, 2006; Mordi, 2006; CBN, 2000).

1.2 Statement of Problems

Despite the theoretical importance of exchange rates for international trade, and despite the substantial exchange rate fluctuations experienced by Nigeria during the period 1980-2008, the empirical relationship between exchange rate fluctuations and international trade transactions in Nigeria has not been adequately established. The Nigerian economy has experienced significant exchange rate volatility, multiple policy regime changes, and major external shocks, yet the magnitude, direction, and timing of the impact of exchange rate fluctuations on trade volumes, values, and patterns remain unclear. Policymakers lack robust empirical evidence on questions such as: Does exchange rate depreciation improve Nigeria’s trade balance (Marshall-Lerner condition)? How long does it take for the trade balance to adjust (J-curve)? Does exchange rate volatility reduce trade volume? Which trade sectors (oil, non-oil exports, imports) are most affected? The unresolved nature of these questions constitutes the central problem addressed by this study (Obadan, 2006; Mordi, 2006; Okafor, 2012; Adeniyi and Egwaikhide, 2011).

The first critical problem concerns the validity of the Marshall-Lerner condition for Nigeria. The Marshall-Lerner condition states that a depreciation will improve the trade balance if the sum of the price elasticities of demand for exports and imports exceeds one. For Nigeria, where oil exports dominate, the price elasticity of demand for oil is low (oil importers have few substitutes in the short run), so the sum may be less than one, implying that depreciation could worsen the trade balance (contradicting conventional wisdom). However, the price elasticity for non-oil exports (if developed) could be higher. The problem is that the price elasticities of demand for Nigerian exports and imports have not been robustly estimated, leaving policymakers uncertain about whether depreciation will improve or worsen the trade balance (Bahmani-Oskooee and Fariditavana, 2016; Onyekachi and Okafor, 2013; Obadan, 2006).

The second critical problem concerns the J-curve phenomenon in Nigeria. The J-curve predicts that the trade balance will initially worsen following depreciation (because import prices rise immediately while export volumes adjust slowly), then improve over time as volumes adjust. The time lag for adjustment has important policy implications: if adjustment takes several years, policymakers must be patient; if adjustment is rapid, results will be seen quickly. The problem is that the J-curve has not been adequately tested for Nigeria using appropriate time-series methods (cointegration, error correction models), and the adjustment lag is unknown (Bahmani-Oskooee and Fariditavana, 2016; Onyekachi and Okafor, 2013).

The third critical problem concerns the impact of exchange rate volatility on trade volume. Exchange rate volatility creates uncertainty about future export revenues and import costs, which may discourage trade. Exporters may be reluctant to invest in export capacity if they are uncertain about the naira value of future dollar receipts. Importers may be reluctant to place orders if they are uncertain about future naira costs. The problem is that the impact of exchange rate volatility on Nigeria’s trade volume has not been quantified. Does volatility reduce trade? If so, by how much? The answer has implications for whether the CBN should intervene to reduce volatility (smooth the exchange rate) or allow it to fluctuate (Arize et al., 2000; Bahmani-Oskooee and Hegerty, 2007; Obadan, 2006).

The fourth critical problem concerns the asymmetry of exchange rate pass-through to import prices. When the naira depreciates, import prices increase (pass-through), contributing to inflation. When the naira appreciates, import prices may not decrease (asymmetric pass-through) because importers may maintain prices to increase profit margins. The problem is that the degree and symmetry of pass-through in Nigeria have not been well estimated. If pass-through is high and asymmetric, the CBN must be vigilant about depreciation episodes (which cause inflation) but may be less concerned about appreciation episodes (which may not cause disinflation). The asymmetry has implications for monetary policy (Adeniyi and Egwaikhide, 2011; Odularu, 2008; Okafor, 2012).

The fifth critical problem concerns the impact of multiple exchange rate regimes (fixed, dual, managed float) on trade transactions. Nigeria experienced multiple exchange rate regime changes during 1980-2008: fixed (1980-1986), dual (SFEM, 1986-1989), managed float with auctions (1990-1994), fixed (1995-1999), managed float with auctions (1999-2006), and managed float with WDAS (2006-2008). Each regime had different effects on trade transactions (e.g., availability of foreign exchange, predictability of exchange rates, parallel market premium). The problem is that the impact of regime changes on trade has not been systematically analysed. Which regime was most conducive to trade? Which regime was most harmful? The answer has implications for policy design (Obadan, 1994; Obadan, 2006; Mordi, 2006).

1.3 Aim of the Study

The specific aim of this research work is to empirically examine the impact of exchange rate fluctuations on international trade transactions in Nigeria over the period 1980-2008, with a particular focus on analysing the relationship between exchange rate movements and trade balance, testing the Marshall-Lerner condition and J-curve phenomenon, quantifying the impact of exchange rate volatility on trade volume, estimating exchange rate pass-through to import prices, and evaluating the effects of exchange rate regime changes on trade transactions.

1.4 Objectives of the Study

1. To examine the long-run relationship (cointegration) between exchange rate fluctuations and Nigeria’s trade balance (exports, imports, net exports) over the period 1980-2008.

2. To test the Marshall-Lerner condition for Nigeria by estimating the price elasticities of demand for exports and imports, and to determine whether depreciation improves or worsens the trade balance.

3. To test for the J-curve phenomenon (the initial worsening of the trade balance following depreciation followed by improvement) in Nigeria using impulse response functions and lag distribution analysis.

4. To quantify the impact of exchange rate volatility (measured by standard deviation of real exchange rate changes) on the volume of Nigeria’s exports and imports over the period 1980-2008.

5. To evaluate the impact of different exchange rate regimes (fixed, dual, managed float, auction systems) on Nigeria’s international trade transactions and to derive policy implications.

1.5 Research Questions

1. What is the long-run relationship (cointegration) between exchange rate fluctuations and Nigeria’s trade balance (exports, imports, net exports) over the period 1980-2008?

2. Does the Marshall-Lerner condition hold for Nigeria, i.e., does depreciation of the naira lead to an improvement in the trade balance?

3. Is there evidence of the J-curve phenomenon in Nigeria, i.e., does the trade balance initially worsen following depreciation before improving over time?

4. What is the impact of exchange rate volatility on the volume of Nigeria’s exports and imports over the period 1980-2008?

5. How did different exchange rate regimes (fixed, dual, managed float, auction systems) affect Nigeria’s international trade transactions during 1980-2008?

1.6 Research Hypotheses

Hypothesis 1

H0₁: Exchange rate fluctuations have no significant long-run relationship (cointegration) with Nigeria’s trade balance (exports, imports, net exports) over the period 1980-2008.

H1₁: Exchange rate fluctuations have a significant long-run relationship with Nigeria’s trade balance.

Hypothesis 2

H0₂: The Marshall-Lerner condition does not hold for Nigeria; depreciation of the naira does not lead to an improvement in the trade balance.

H1₂: The Marshall-Lerner condition holds for Nigeria; depreciation leads to an improvement in the trade balance.

Hypothesis 3

H0₃: There is no evidence of the J-curve phenomenon in Nigeria; the trade balance does not initially worsen following depreciation before improving.

H1₃: There is evidence of the J-curve phenomenon in Nigeria.

Hypothesis 4

H0₄: Exchange rate volatility has no significant negative effect on the volume of Nigeria’s exports and imports.

H1₄: Exchange rate volatility has a significant negative effect on the volume of Nigeria’s exports and imports.

Hypothesis 5

H0₅: Different exchange rate regimes (fixed, dual, managed float, auction systems) have no significant effect on Nigeria’s international trade transactions.

H1₅: Different exchange rate regimes have a significant effect on Nigeria’s international trade transactions.

1.7 Justification of the Study

This study is justified by the critical importance of exchange rate policy for international trade and economic development in Nigeria. International trade is essential for Nigeria: oil exports provide the majority of government revenue and foreign exchange earnings; imports supply machinery, raw materials, refined petroleum, and consumer goods that are essential for production and consumption. Exchange rate fluctuations affect the cost of imports, the profitability of exports, the balance of payments, and the overall competitiveness of the Nigerian economy. Understanding the impact of exchange rate fluctuations on trade is essential for designing appropriate exchange rate policies (e.g., fixed vs floating, intervention strategies), trade policies (e.g., tariffs, export promotion), and monetary policies (e.g., inflation targeting, reserve management). The study is further justified by the limited empirical research on the exchange rate-trade nexus in Nigeria that (a) uses robust time-series econometric methods (cointegration, error correction, impulse response), (b) covers the period 1980-2008 (which includes multiple regime changes and external shocks), and (c) tests key hypotheses (Marshall-Lerner, J-curve, volatility effects). This study addresses these gaps by providing a comprehensive empirical analysis of the impact of exchange rate fluctuations on Nigeria’s international trade transactions (Obadan, 2006; Mordi, 2006; Bahmani-Oskooee and Fariditavana, 2016; Onyekachi and Okafor, 2013).

1.8 Significance of the Study

This study makes significant contributions to multiple stakeholder groups with interests in exchange rate policy and international trade in Nigeria. For the Central Bank of Nigeria (CBN), the study provides empirical evidence on the relationship between exchange rate fluctuations and trade balance (Marshall-Lerner condition, J-curve), enabling more informed exchange rate policy decisions (e.g., whether to allow depreciation to improve trade balance, how much intervention to smooth volatility). For the Federal Ministry of Finance and the Ministry of Trade and Investment, the study provides evidence on the impact of exchange rate volatility on trade volume, informing trade promotion strategies (e.g., hedging mechanisms for exporters, trade credit insurance). For the National Assembly and oversight committees, the study provides an evidence base for evaluating exchange rate policy and holding the CBN accountable. For Nigerian exporters and importers, the study provides insights into how exchange rate fluctuations affect their profitability and risk, informing business planning and risk management (e.g., hedging with forwards, options). For academic researchers, the study contributes to the literature on exchange rate economics in developing economies, testing and extending theories (Marshall-Lerner, J-curve, volatility effects) in the Nigerian context. For international development partners (IMF, World Bank), the study provides country-specific evidence to inform policy advice and technical assistance on exchange rate management and trade policy (Obadan, 2006; Mordi, 2006; Bahmani-Oskooee and Fariditavana, 2016; Arize et al., 2000).

1.9 Scope of the Study

The scope of this study is delimited to an examination of the impact of exchange rate fluctuations on international trade transactions in Nigeria over the period 1980-2008. The study focuses specifically on the relationship between exchange rate indicators (nominal exchange rate, real exchange rate, exchange rate volatility, parallel market premium) and trade indicators (export volume, export value, import volume, import value, trade balance). The study includes both oil exports (which dominate) and non-oil exports (agriculture, solid minerals, manufactured goods). The study includes imports of goods (machinery, manufactured goods, raw materials, refined petroleum, food) but does not include trade in services (tourism, transportation, financial services) due to data limitations. The study uses annual time-series data from 1980 to 2008 (29 observations) obtained from the Central Bank of Nigeria Statistical Bulletin, National Bureau of Statistics, International Monetary Fund, and World Bank. The study employs econometric techniques appropriate for time-series analysis: unit root tests (ADF, PP), cointegration tests (Engle-Granger, Johansen), error correction models (ECM), impulse response functions, variance decomposition, and Granger causality tests. The study does not include a detailed analysis of trade policy (tariffs, quotas, non-tariff barriers) except as control variables. The study does not include a detailed analysis of sectoral trade (e.g., agriculture vs manufacturing) except in the aggregate. The study does not include a detailed analysis of the parallel market (except as a variable) due to data limitations. The study is limited to Nigeria and does not include cross-country comparative analysis, although findings may have applicability to other oil-exporting developing economies.

1.10 Definition of Terms

Exchange Rate: The price of one currency in terms of another; in the Nigerian context, the rate at which the naira exchanges for other currencies, particularly the US dollar (CBN, 2000; Obadan, 2006).

Nominal Exchange Rate (NER) : The price of one currency in terms of another without adjustment for price levels; e.g., ₦1 = $0.00667 (150 naira per dollar) (Obadan, 2006; Mordi, 2006).

Real Exchange Rate (RER) : The nominal exchange rate adjusted for relative price levels (domestic price level relative to foreign price level); RER = NER × (P/P), where P is domestic price level and P is foreign price level. An increase (real depreciation) indicates improved competitiveness (Obadan, 2006; Mordi, 2006).

Depreciation: A decrease in the value of the domestic currency relative to foreign currencies, meaning that more naira are required to purchase one unit of foreign currency (e.g., from ₦100/) (CBN, 2000; Obadan, 2006).

Appreciation: An increase in the value of the domestic currency relative to foreign currencies, meaning that fewer naira are required to purchase one unit of foreign currency (e.g., from ₦150/) (CBN, 2000; Obadan, 2006).

Exchange Rate Volatility: The degree of variation or fluctuation in the exchange rate over time, measured by the standard deviation or coefficient of variation of exchange rate changes (Mordi, 2006; Arize et al., 2000).

Parallel Market Premium: The percentage difference between the parallel (black) market exchange rate and the official exchange rate; a positive premium indicates that the official rate is overvalued (Obadan, 1994; Mordi, 2006).

Trade Balance: The difference between the value of a country’s exports and the value of its imports; a positive trade balance (surplus) means exports exceed imports; a negative trade balance (deficit) means imports exceed exports (CBN, 2000; Obadan, 2006).

Marshall-Lerner Condition: The condition under which a depreciation of the domestic currency will improve the trade balance: the sum of the price elasticities of demand for exports and imports must exceed one (Bahmani-Oskooee and Fariditavana, 2016; Obadan, 2006).

J-Curve: The phenomenon where a country’s trade balance initially worsens following a depreciation (because import prices rise immediately while export volumes adjust slowly), then improves over time as export and import volumes adjust (Bahmani-Oskooee and Fariditavana, 2016; Onyekachi and Okafor, 2013).

Exchange Rate Pass-Through: The degree to which changes in the exchange rate are reflected in domestic prices (import prices, consumer prices). High pass-through means that depreciation leads to higher inflation (Adeniyi and Egwaikhide, 2011; Odularu, 2008).

Second-Tier Foreign Exchange Market (SFEM) : A dual exchange rate system introduced in 1986 as part of SAP, with an official rate for government transactions and a market-determined rate for other transactions (CBN, 2000; Obadan, 1994).

Dutch Auction System (DAS) : A foreign exchange allocation system introduced in 1999, where the CBN conducts periodic auctions, banks bid on behalf of customers, and the exchange rate is determined by bid prices (CBN, 2000; Mordi, 2006).

Wholesale Dutch Auction System (WDAS) : A refinement of the DAS introduced in 2006, where the CBN sells foreign exchange to banks in wholesale quantities, and the exchange rate is determined by the auction (Mordi, 2006; CBN, 2006).

Cointegration: A statistical property of time-series variables indicating that a linear combination of them is stationary (does not drift apart over time), implying a long-run equilibrium relationship (Obadan, 2006; Onyekachi and Okafor, 2013).

Error Correction Model (ECM) : An econometric model that captures both short-run dynamics and long-run equilibrium adjustment; used to test for Granger causality and to estimate speed of adjustment (Obadan, 2006; Onyekachi and Okafor, 2013).

CHAPTER TWO: LITERATURE REVIEW

2.1 Theoretical Review

The theoretical foundation for examining the impact of exchange rate fluctuations on international trade transactions in Nigeria draws from multiple theoretical perspectives in international economics, monetary economics, and development economics. This section critically reviews the principal theories informing understanding of the relationship between exchange rates and international trade, including the elasticity approach (Marshall-Lerner condition), the J-curve phenomenon, the absorption approach, the monetary approach, the portfolio balance approach, the theory of exchange rate pass-through, and the exchange rate volatility and trade theory.

2.1.1 Elasticity Approach and Marshall-Lerner Condition

The elasticity approach to the balance of trade, developed in the 1930s and 1940s by Alfred Marshall, Abba Lerner, and Joan Robinson, provides the foundational framework for understanding how exchange rate changes affect the trade balance. The approach focuses on the price elasticities of demand for exports and imports. The Marshall-Lerner condition states that a depreciation (or devaluation) of the domestic currency will improve the trade balance if and only if the sum of the price elasticities of demand for exports and imports exceeds one. Formally, if ηx is the price elasticity of demand for exports (percentage change in export volume divided by percentage change in export price in foreign currency) and ηm is the price elasticity of demand for imports (percentage change in import volume divided by percentage change in import price in domestic currency), then depreciation improves the trade balance if ηx + ηm > 1. If the sum is less than one, depreciation worsens the trade balance; if the sum equals one, depreciation has no effect (Marshall, 1923; Lerner, 1944; Robinson, 1947; Bahmani-Oskooee and Fariditavana, 2016).

The elasticity approach has important implications for understanding the impact of exchange rate fluctuations on Nigeria’s trade balance. For Nigeria, where oil exports dominate (accounting for 90-95% of export earnings during the study period), the price elasticity of demand for oil exports (ηx) is low, estimated to be between 0.1 and 0.3 (in absolute value), because oil is a necessity with few substitutes in the short run. The price elasticity of demand for imports (ηm) may be higher, particularly for non-essential goods, but for essential imports (machinery, refined petroleum, raw materials) it may also be low. The sum ηx + ηm may be less than one, implying that depreciation could worsen Nigeria’s trade balance. However, the elasticity of demand for non-oil exports (if developed) could be higher, and the long-run elasticities may be higher than short-run elasticities. The theory suggests that the effectiveness of depreciation as a policy tool to improve the trade balance depends on the structural characteristics of the economy (Obadan, 2006; Bahmani-Oskooee and Fariditavana, 2016; Onyekachi and Okafor, 2013).

The elasticity approach also highlights the role of supply elasticities. If supply is inelastic (e.g., oil production constrained by OPEC quotas or field capacity), export volume may not increase in response to increased demand (from depreciation), limiting the trade balance improvement. For Nigeria, oil production is constrained by OPEC quotas, infrastructure, and investment levels, so supply elasticity is low. For non-oil exports, supply elasticity may be higher in the long run (as farmers and manufacturers respond to price incentives), but is low in the short run. The theory suggests that exchange rate policy should be complemented by supply-side policies (investment in oil production capacity, diversification into non-oil exports) to be effective (Obadan, 2006; Mordi, 2006; Bahmani-Oskooee and Fariditavana, 2016).

The application of the elasticity approach to Nigeria must also consider the role of the parallel market. During periods of overvaluation (official rate below equilibrium) and high parallel market premium, the effective exchange rate for importers who cannot access official foreign exchange is the parallel rate, not the official rate. Depreciation of the official rate (bringing it closer to the parallel rate) may have little effect on import volumes if importers were already using the parallel rate. The theory suggests that exchange rate unification (eliminating the gap between official and parallel rates) is necessary for depreciation to be effective. The Marshall-Lerner condition should be tested using the real effective exchange rate (which accounts for the parallel market) rather than the official rate (Obadan, 1994; Mordi, 2006).

2.1.2 J-Curve Phenomenon

The J-curve phenomenon, first articulated by Magee (1973) and subsequently developed by Bahmani-Oskooee (1985) and others, describes the time path of the trade balance following a depreciation or devaluation. The J-curve predicts that the trade balance will initially worsen after depreciation (the “J” shape: a dip down) before improving. The initial worsening occurs because import prices rise immediately (pass-through), increasing the value of imports, while export volumes adjust slowly (due to contracts, recognition lags, decision lags, delivery lags, and replacement lags). Over time, as export volumes increase (foreign buyers respond to lower prices) and import volumes decrease (domestic buyers respond to higher prices), the trade balance improves, eventually surpassing the pre-depreciation level. The J-curve implies that the Marshall-Lerner condition may hold in the long run but not in the short run (Magee, 1973; Bahmani-Oskooee, 1985; Bahmani-Oskooee and Fariditavana, 2016).

The J-curve phenomenon has important implications for understanding the impact of exchange rate fluctuations on Nigeria’s trade balance. The theory suggests that the trade balance may worsen in the first 6-12 months following a depreciation (as import prices rise and contract lags delay volume adjustments), then begin to improve after 12-24 months, and fully adjust after 2-3 years. The policy implication is that the CBN should not expect immediate improvement; patience is required. Premature reversal of the depreciation (appreciating the currency back) could prevent the improvement from materialising. The J-curve also suggests that the speed of adjustment depends on the structure of trade (e.g., prevalence of long-term contracts, perishability of goods, availability of substitutes). For oil exports (which are sold on spot markets, not long-term contracts), the adjustment lag may be shorter; for manufactured imports, the adjustment lag may be longer (Magee, 1973; Bahmani-Oskooee and Fariditavana, 2016; Onyekachi and Okafor, 2013).

The J-curve phenomenon has been tested extensively using distributed lag models (Almon lags), autoregressive distributed lag (ARDL) models, and impulse response functions from vector autoregression (VAR). Studies for developing countries have found evidence of the J-curve, though the evidence is stronger for bilateral trade (with specific trading partners) than for aggregate trade, and stronger for trade with developed countries than with developing countries. For Nigeria, the evidence is mixed: some studies find evidence of the J-curve, others do not. The mixed findings reflect differences in methodology, data frequency (monthly vs annual), time period, and exchange rate measure (nominal vs real, official vs parallel) (Bahmani-Oskooee and Fariditavana, 2016; Onyekachi and Okafor, 2013; Bahmani-Oskooee and Ratha, 2004).

The application of the J-curve phenomenon to Nigeria suggests that researchers should use quarterly or monthly data (rather than annual) to capture short-run dynamics, because the initial worsening may occur within months and may be averaged out in annual data. The study period 1980-2008 includes annual data, but quarterly data may be available for a shorter sub-period. The theory also suggests that the J-curve should be tested using the real effective exchange rate (REER) rather than the nominal exchange rate, because the REER accounts for inflation differentials. The REER may be more relevant for the J-curve, as the trade balance responds to relative prices, not just nominal prices (Bahmani-Oskooee and Fariditavana, 2016; Bahmani-Oskooee and Ratha, 2004).

2.1.3 Absorption Approach

The absorption approach to the balance of trade, developed by Alexander (1952) and others, provides an alternative framework to the elasticity approach by focusing on the relationship between domestic income (output), domestic absorption (spending), and the trade balance. The approach starts from the national income identity: Y = C + I + G + (X – M), where Y is national income, C is consumption, I is investment, G is government spending, X is exports, and M is imports. The trade balance (X – M) can be expressed as Y – (C + I + G) = Y – A, where A is domestic absorption. Therefore, the trade balance equals national income minus domestic absorption. A depreciation improves the trade balance if it increases income (Y) relative to absorption (A), or decreases absorption relative to income, or both (Alexander, 1952; Johnson, 1958; Frenkel and Johnson, 1976).

The absorption approach has important implications for understanding the impact of exchange rate fluctuations on Nigeria’s trade balance. The approach suggests that depreciation can improve the trade balance through two channels: the income channel (depreciation increases export demand, which increases income, which increases saving and reduces the trade deficit) and the absorption channel (depreciation increases the domestic price of imported goods, reducing real wealth and consumption, which reduces absorption). However, depreciation may also have contractionary effects: if the economy is at full employment, increased export demand may cause inflation, not output increase; if the economy has idle capacity, depreciation may increase output. The approach suggests that the effectiveness of depreciation depends on the state of the economy (recession vs boom) and the degree of capacity utilisation (Alexander, 1952; Johnson, 1958; Agénor and Montiel, 1996).

For Nigeria, the absorption approach is relevant because the economy has often operated below full capacity (due to infrastructure constraints, policy uncertainty, and Dutch disease effects). During recessions (e.g., the 1980s, the 1990s), depreciation could stimulate output (through increased export demand) and improve the trade balance. During booms (e.g., the 2000s), depreciation may cause inflation without output gains. The absorption approach also highlights the role of fiscal policy: if the government responds to depreciation by increasing spending (absorption), the trade balance improvement may be offset. Coordination of exchange rate policy and fiscal policy is therefore essential (Obadan, 2006; Agénor and Montiel, 1996; Iyoha, 2004).

The absorption approach also addresses the issue of the “transfer problem”: whether depreciation can improve the trade balance if the economy is already at full employment. If the economy is at full employment, increased export demand will cause inflation, which will increase the demand for money, which will increase interest rates, which will attract capital inflows, which will appreciate the currency, offsetting the initial depreciation. This is the “monetary approach to the balance of payments” (discussed below). The absorption approach suggests that depreciation is more effective when there is slack in the economy (unemployed resources) (Alexander, 1952; Johnson, 1958; Frenkel and Johnson, 1976).

2.1.4 Monetary Approach to the Balance of Payments

The monetary approach to the balance of payments (MABP), developed by Mundell (1963), Johnson (1972), and Frenkel and Johnson (1976), provides a framework that integrates the balance of payments with monetary theory. The approach argues that the balance of payments is fundamentally a monetary phenomenon: a deficit reflects an excess supply of money; a surplus reflects an excess demand for money. Under a fixed exchange rate regime, the balance of payments adjusts to equilibrate the money market: if the domestic money supply exceeds money demand, the excess flows out (balance of payments deficit) until equilibrium is restored. Under a floating exchange rate regime, the exchange rate adjusts to equilibrate the money market. The approach implies that exchange rate changes (under floating) are determined by relative money supplies, interest rates, and income levels (Mundell, 1963; Johnson, 1972; Frenkel and Johnson, 1976).

The monetary approach has important implications for understanding the impact of exchange rate fluctuations on international trade. The approach suggests that trade deficits are not caused by exchange rate misalignment per se, but by monetary imbalances. Depreciation may be necessary to correct a trade deficit if it is caused by monetary expansion, but if the trade deficit is caused by structural factors (e.g., low productivity, high tariffs, poor infrastructure), depreciation may not be effective. The approach also implies that the effects of depreciation on the trade balance are temporary unless accompanied by monetary restraint. If the monetary authority accommodates the depreciation by increasing the money supply, the initial improvement in the trade balance will be reversed (Mundell, 1963; Johnson, 1972; Frenkel and Johnson, 1976).

For Nigeria, the monetary approach is relevant because the country has experienced periods of rapid monetary expansion (financing fiscal deficits) and periods of monetary restraint (stabilisation programmes). The oil boom of the 1970s led to rapid monetary expansion (as oil revenues were spent), causing inflation and balance of payments deficits in the 1980s. The Structural Adjustment Programme (SAP) of 1986 included monetary restraint (tight credit policy) to support the devaluation. The monetary approach suggests that for depreciation to be effective, it must be accompanied by monetary restraint; otherwise, inflation will erode the competitiveness gains. The problem is that Nigeria has often failed to maintain monetary restraint, leading to recurrent balance of payments crises (Iyoha, 2004; Obadan, 2006; Okonjo-Iweala, 2012).

The monetary approach also addresses the role of expectations. If market participants expect future depreciation, they will increase their demand for foreign exchange (to avoid holding naira), causing immediate depreciation (self-fulfilling prophecy). The central bank can break the cycle by raising interest rates (to increase the demand for naira) or by intervening in the foreign exchange market (selling foreign exchange). The approach suggests that credibility matters: if the central bank is committed to a stable exchange rate, expectations will be stabilised; if the central bank has a history of policy reversals, expectations will be destabilising (Mundell, 1963; Johnson, 1972; Obiora, 2009).

2.1.5 Portfolio Balance Approach

The portfolio balance approach to exchange rate determination, developed by Branson (1977), Kouri (1976), and others, extends the monetary approach by incorporating the role of asset markets and portfolio choices. The approach recognises that domestic and foreign assets are not perfect substitutes (due to risk, liquidity, and regulatory differences) and that investors care about the composition of their asset portfolios as well as their total wealth. The exchange rate is determined by the relative supply of domestic and foreign assets. An increase in the supply of domestic government bonds (debt) may lead to a depreciation if investors rebalance their portfolios by selling domestic assets and buying foreign assets. Central bank intervention (buying or selling foreign exchange) affects the exchange rate by changing the relative supply of assets (Branson, 1977; Kouri, 1976; Dooley and Isard, 1982).

The portfolio balance approach has important implications for understanding the impact of exchange rate fluctuations on international trade. The approach suggests that exchange rate volatility may be caused by portfolio shifts (e.g., investors shifting from naira assets to dollar assets) as well as by trade flows. This volatility may discourage trade (as discussed in Section 2.1.7). The approach also suggests that the government can influence the exchange rate through sterilised intervention (selling foreign exchange while offsetting the monetary effect by selling bonds) because it changes the relative supply of assets. However, the effectiveness of sterilised intervention is limited if domestic and foreign assets are close substitutes. For Nigeria, the portfolio balance approach is relevant because the liberalisation of the capital market in the 1990s and 2000s increased foreign portfolio investment, which has become a significant determinant of the exchange rate (Obiora, 2009; Mordi, 2006; CBN, 2000).

The portfolio balance approach also addresses the impact of exchange rate expectations on capital flows. If investors expect the naira to depreciate, they will sell naira assets and buy foreign assets, leading to capital outflows and further depreciation (self-fulfilling). The central bank can raise interest rates to increase the return on naira assets, attracting capital inflows and supporting the exchange rate. The approach suggests that exchange rate policy must be coordinated with monetary policy (interest rates) and fiscal policy (debt management) to be effective. For Nigeria, the high public debt (domestic and external) during the 1980s and 1990s affected exchange rate expectations and capital flows (Obiora, 2009; Mordi, 2006; Okonjo-Iweala, 2012).

2.1.6 Theory of Exchange Rate Pass-Through

The theory of exchange rate pass-through (ERPT) examines the degree to which changes in the exchange rate are reflected in domestic prices (import prices, producer prices, consumer prices). The degree of pass-through depends on several factors: the share of imports in consumption (higher import share, higher pass-through); the pricing behaviour of firms (pricing-to-market, local currency pricing); the responsiveness of monetary policy; and the inflation environment (low inflation environments have lower pass-through). For Nigeria, the share of imports in consumption is high (particularly for refined petroleum, machinery, manufactured goods), so pass-through is expected to be high. The inflation environment has been volatile (high inflation in the 1980s and 1990s, lower inflation in the 2000s), which may affect pass-through (Goldberg and Knetter, 1997; Campa and Goldberg, 2005; Gagnon and Ihrig, 2004).

Exchange rate pass-through has important implications for the impact of exchange rate fluctuations on international trade. High pass-through means that depreciation leads to higher import prices, which reduces import demand (volume) and increases the value of imports (if demand is inelastic). The net effect on the trade balance depends on the price elasticity of import demand. High pass-through also means that depreciation leads to higher consumer prices (inflation), which may erode the competitiveness gains from depreciation (if domestic wages and costs rise). For Nigeria, the high pass-through to refined petroleum prices (which are subsidised) is complicated by government subsidies; the pass-through may be attenuated by subsidies but may be realised when subsidies are removed (Odularu, 2008; Adeniyi and Egwaikhide, 2011; Okafor, 2012).

The theory of exchange rate pass-through also addresses asymmetry: depreciation may be passed through more fully than appreciation, due to downward price rigidity. When the naira depreciates, importers and domestic producers may pass on the cost increase quickly. When the naira appreciates, they may be reluctant to lower prices, maintaining profit margins. This asymmetry has implications for trade: during appreciation episodes, import volumes may not increase as much as expected (because prices do not fall), and the trade deficit may not improve. For Nigeria, asymmetry has been documented in some studies (Adeniyi and Egwaikhide, 2011; Okafor, 2012).

The application of ERPT theory to Nigeria suggests that the impact of exchange rate fluctuations on trade occurs through the price channel: depreciation increases import prices, reducing import demand (volume) and increasing the naira value of imports (value). The net effect on the trade balance depends on the price elasticity of import demand. If import demand is inelastic (as for essential goods), the value effect dominates, and the trade deficit may worsen (even if volume falls). The theory suggests that the CBN should consider the composition of imports (essential vs non-essential) when assessing the impact of depreciation on the trade balance (Odularu, 2008; Adeniyi and Egwaikhide, 2011; Okafor, 2012).

2.1.7 Exchange Rate Volatility and Trade Theory

The theory of exchange rate volatility and trade, developed by Clark (1973), Hooper and Kohlhagen (1978), and others, examines how exchange rate uncertainty affects international trade flows. Exchange rate volatility creates risk for exporters and importers: exporters are uncertain about the domestic currency value of future export receipts; importers are uncertain about the domestic currency cost of future import payments. This risk may reduce trade volume for several reasons: risk-averse firms may reduce their trade activity; firms may delay investment in trade-related capacity; firms may incur hedging costs (forwards, options) that increase transaction costs; and the presence of sunk costs (e.g., establishing distribution networks) may deter entry into export markets. The theory predicts a negative relationship between exchange rate volatility and trade volume, though the magnitude depends on the availability of hedging instruments and the degree of risk aversion (Clark, 1973; Hooper and Kohlhagen, 1978; Arize, Osang, and Slottje, 2000).

The theory of exchange rate volatility and trade has important implications for understanding the impact of exchange rate fluctuations on Nigeria’s international trade. Nigeria has experienced significant exchange rate volatility throughout 1980-2008, with periods of high volatility (e.g., during the SAP period, 1986-1990; during the fixed exchange rate period, 1995-1999, with a large parallel market premium) and periods of lower volatility (e.g., the WDAS period, 2006-2008). High volatility may have reduced trade volume, particularly for non-oil exports (which are more sensitive to risk than oil exports, which are priced in dollars). The theory suggests that the CBN should aim to reduce volatility (not just manage the level) to promote trade. Hedging instruments (forwards, options) can help firms manage risk, but the Nigerian foreign exchange market is underdeveloped, with limited availability of hedging instruments, especially during the earlier part of the period (Arize et al., 2000; Bahmani-Oskooee and Hegerty, 2007; Mordi, 2006).

The empirical literature on exchange rate volatility and trade has produced mixed findings. Some studies find a significant negative effect, others find no effect, and still others find a positive effect (if firms increase trade to hedge risk). The mixed findings reflect differences in measurement (volatility measures: standard deviation, conditional variance from GARCH models), data frequency (monthly, quarterly, annual), country coverage (developed vs developing), and econometric methodology. For developing countries, the effect is generally found to be negative but larger than for developed countries (because hedging instruments are less available). For Nigeria, studies have found a negative effect of volatility on exports, particularly for non-oil exports (Arize et al., 2000; Bahmani-Oskooee and Hegerty, 2007; Onyekachi and Okafor, 2013).

The application of volatility theory to Nigeria suggests that researchers should measure volatility using the real exchange rate (not nominal) and using GARCH models to generate conditional volatility (time-varying) rather than rolling standard deviation (which assumes constant volatility within the window). The study period 1980-2008 includes enough observations (29 annual) for GARCH estimation, though quarterly or monthly data would be better. The theory also suggests that the effect of volatility should be tested using a gravity model (which controls for GDP, distance, etc.) or a reduced-form export demand equation. The analysis should distinguish between oil and non-oil exports, and between imports and exports (Arize et al., 2000; Bahmani-Oskooee and Hegerty, 2007).

2.2 Conceptual Framework

The conceptual framework for this study specifies the relationship between exchange rate fluctuations (independent variable) and international trade transactions (dependent variable) in Nigeria, with intervening and moderating variables that affect this relationship. The framework identifies the key exchange rate indicators, the transmission channels, and the trade outcomes.

2.2.1 Independent Variables: Exchange Rate Fluctuations

The first independent variable is the nominal exchange rate (NER), measured as the official exchange rate (naira per US dollar) and the parallel market exchange rate. Changes in the NER (depreciation or appreciation) affect the price competitiveness of exports and the cost of imports. The parallel market premium (difference between parallel and official rates) measures exchange rate pressure and policy credibility (Obadan, 2006; Mordi, 2006; CBN, 2000).

The second independent variable is the real exchange rate (RER), measured as the nominal exchange rate adjusted for relative price levels (RER = NER × (P/P), where P is domestic price level and P is foreign price level). The RER is a measure of competitiveness: an increase (real depreciation) indicates improved competitiveness. The RER is preferred for trade analysis because it accounts for inflation differentials (Obadan, 2006; Mordi, 2006).

The third independent variable is exchange rate volatility, measured as the standard deviation (or coefficient of variation) of exchange rate changes, or the conditional variance from a GARCH model. Volatility measures exchange rate risk, which may reduce trade volume (Arize et al., 2000; Bahmani-Oskooee and Hegerty, 2007).

2.2.2 Intervening Variables: Transmission Channels

The relationship between exchange rate fluctuations and trade is mediated by several channels. The price channel: depreciation increases the naira price of imports (pass-through) and reduces the foreign currency price of exports (improving competitiveness). The volume channel: changes in prices lead to changes in export and import volumes, depending on price elasticities. The income channel: changes in export demand affect national income, which affects import demand (absorption approach). The expectations channel: expectations of future exchange rate changes affect hedging behaviour and contract duration. The risk channel: exchange rate volatility creates uncertainty, reducing trade volume (Arize et al., 2000; Bahmani-Oskooee and Fariditavana, 2016; Obadan, 2006).

2.2.3 Dependent Variables: International Trade Transactions

The first dependent variable is export volume (oil exports, non-oil exports, total exports). The second dependent variable is export value (in naira and US dollars). The third dependent variable is import volume. The fourth dependent variable is import value (in naira and US dollars). The fifth dependent variable is the trade balance (exports minus imports) (CBN, 2000; Obadan, 2006; Onyekachi and Okafor, 2013).

2.2.4 Moderating Variables

The relationship between exchange rate fluctuations and international trade is moderated by several variables. Trade policy: tariffs, quotas, import bans, export promotion policies affect the responsiveness of trade to exchange rate changes. Oil price: the price of crude oil (which determines Nigeria’s export earnings) is exogenous and affects the exchange rate (through supply of foreign exchange). GDP growth (domestic and trading partners): affects import demand and export demand. Foreign exchange regime: fixed, dual, managed float, auction systems affect the transmission of exchange rate changes to trade (Obadan, 2006; Mordi, 2006; CBN, 2000).

2.2.5 Representation of the Conceptual Framework

The conceptual framework can be represented as follows:

Independent Variables (Exchange Rate Fluctuations)

• Nominal exchange rate (official, parallel)
• Real exchange rate (competitiveness)
• Exchange rate volatility (risk)

Intervening Variables (Transmission Channels)

• Price channel (pass-through)
• Volume channel (elasticities)
• Income channel (absorption)
• Expectations channel
• Risk channel

Moderating Variables

• Trade policy (tariffs, quotas)
• Oil price
• GDP growth (domestic, trading partners)
• Foreign exchange regime

Dependent Variables (International Trade Transactions)

• Export volume (oil, non-oil)
• Export value (naira, USD)
• Import volume
• Import value (naira, USD)
• Trade balance

The framework guides the empirical investigation of the impact of exchange rate fluctuations on international trade transactions in Nigeria over the period 1980-2008.

2.3 Summary of Literature Review in Tabular Format

Author(s) and Year	Strengths of the Study	Weaknesses of the Study	Limitations of the Study	Gaps Identified
Marshall (1923); Lerner (1944); Robinson (1947)	Developed elasticity approach and Marshall-Lerner condition; foundational framework	Assumes infinite supply elasticities; ignores income effects; static	Theoretical framework with extensive empirical testing	Application to Nigerian oil-dominated exports not examined; supply constraints not incorporated
Magee (1973); Bahmani-Oskooee (1985)	Developed J-curve phenomenon; describes time path of trade balance after depreciation	Empirical evidence mixed; depends on frequency and methodology	Theoretical and empirical framework with extensive testing	J-curve in Nigeria not adequately tested; adjustment lag unknown
Alexander (1952); Johnson (1958)	Developed absorption approach; links trade balance to income and spending	Requires full employment assumption; less relevant for developing economies	Theoretical framework with limited empirical testing	Application to Nigeria not examined; absorption effects not quantified
Mundell (1963); Johnson (1972)	Developed monetary approach to balance of payments; integrates money and balance of payments	Assumes fixed exchange rate; less relevant for floating regimes	Theoretical framework with empirical testing in developed economies	Application to Nigerian managed float not examined; monetary factors not incorporated
Branson (1977); Kouri (1976)	Developed portfolio balance approach; incorporates asset markets	Requires deep asset markets; less relevant for developing economies	Theoretical framework with limited empirical testing	Application to Nigerian asset markets not examined; capital flows not incorporated
Goldberg and Knetter (1997); Campa and Goldberg (2005)	Developed