INTERACTIVE EFFECTS OF EXCHANGE RATE VOLATILITY AND POLITICAL INSTABILITY ON NIGERIA–UNITED STATES BILATERAL TRADE

This study investigates the interactional effect of exchange rate volatility and political instability on Nigeria–United States bilateral trade using quarterly time-series data from 1990Q1 to 2024Q4, sourced from the World Bank and World Governance Indicators. Employing Autoregressive Distributed Lag (ARDL) model with interaction terms alongside the Exponential GARCH (EGARCH) framework, the analysis captures both long-run relationships and asymmetric volatility dynamics. The Bound test confirms strong long run cointegration among the variables (F-statistic = 7.416 > upper bound at 1%). ARDL estimates show that exchange rate volatility exerts a positive and significant effect on trade (14.46; p < 0.01), while political instability independently increases trade (64.34; p < 0.01), reflecting temporary crisis-induced trade adjustments, their combined interaction revealed a highly significant negative effect (–13.51; p < 0.01), demonstrating that political instability amplifies the adverse impact of currency fluctuations on bilateral trade. Results from the EGARCH results reveal significant volatility clustering and asymmetric responses to shocks in Nigeria–US bilateral trade, the presence of a significant leverage effect confirms that the impact of shocks on trade volatility is asymmetric. The error correction term (–0.039; p < 0.01) confirms a slow but stable long-run adjustment path, while diagnostic tests validate the model‘s robustness, showing no serial correlation, heteroskedasticity, and multicollinearity, the study concludes that exchange rate volatility may stimulate trade under stable political conditions, its interaction with political instability substantially constrain Nigeria–U.S. trade flows. The study recommends strengthening political institutions, enhancing exchange rate management, and improving risk-mitigation mechanisms to promote sustainable bilateral trade. Keywords: exchange rate volatility, political instability, interaction effects, Bilateral trade, EGARCH, ARDL