Failure of Market and Role of Government

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Joseph, A. I. and Akhanolu, I. (2011) examined the impact of exchange rate volatility on trade flow in Nigeria. Using annual data for the period of 1970-2009, their study estimates the exchange rate volatility with the use of GARCH Model. Results revealed that an inverse and statistical insignificant relationship exist between aggregate trade and exchange rate volatility in Nigeria. Results also revealed that income has a great role to play on trade flow in the country while the exchange rate volatility which is the main variable in the model has a negative effect on the trade flow. The study therefore recommends that monetary authority should ensure transparency in the process for determining exchange rate such that various economic distortions associated with exchange rate might be minimized and fiscal discipline should also be enforced.

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Nuroğlo, E. and Kunst, R. M. (2012) analysed the effects of exchange rate volatility on international trade flows by using two different approaches, the panel data analysis and fuzzy logic. To compare the results a panel with the cross-section dimension of 91 pairs of EU15 countries and with time ranging from 1964 to 2003, and an extended gravity model of trade is applied in order to determine the effects of exchange rate volatility on bilateral trade flows of EU15 countries. The interest focuses especially on the effects of exchange rate volatility on bilateral trade flows. Result revealed that exchange rate volatility has a negative effect on bilateral trade. And the results prove the hypothesis that the fuzzy logic can approximate the effects of exchange rate volatility on trade flows and it can be used as a complement to statistical models. The study recommends the fuzzy approach to be used in economic analysis in the cases where the user does not have a large data set or has problems with the data set that affect the reliability of results.
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