J-CURVE OR THE REVERSE J-CURVE IN NIGERIA: DOES STRUCTURAL BREAK MATTER?

Abstract

The study investigated whether structural break matters in shaping the J-Curve, which highlights the nexus between trade balance and exchange rate movements. The study drew evidence from Nigeria data from 1970 to 2018, while using the 1986 Structural Adjustment Program (SAP) as a fiscal policy initiative criterion to justify the break periods into Pre and Post-SAP. The study adopted the Auto Regression Distributed Lag (ARDL) and Non-Linear Auto Regression Distributed Lag (NARDL) models to account for the asymmetric and non-asymmetric effects. Though the J-Curve hypothesis is not confirmed for Nigeria, the N-shape for the overall and post-SAP period connotes its potentiality. Nevertheless, the failure of the Pre-SAP period to also exhibit an N-Shaped curve but rather an inverted or reverse J-Curve indicate that structural break matters in the shape typology of the J-Curve analysis. Furthermore, foreign income plays a more dominant role than domestic income in affecting Nigeria’s trade balance. To this end, the study suggested that government should pay due consideration while structuring its policies, as the break periods indirectly influence policy outcomes such as J-Curve. In addition, the pursuance of economic diversification will assist to decimate the foreign income-domestic income gap, as well as stem domestic currency depreciation.