Received: 02 Jan 2019 , Published: 08 January 2019
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|1||BASSIRATU BALLAY MANSARAY|
The chief interest of this study is to ascertain the effect trade has on the foreign exchange reserve of Sierra Leone from 1980 to 2014. Data sourced from the World Bank was used to do the empirical analysis. The unit roots test indicated that all variables employed in the study became stationary at first difference. The Johansen cointegration test indicated that there exists a long run relationship between the variables. From impulse response analysis, trade reacted negatively to foreign exchange reserve for the first two years of shock but subsequently reacted positively for the rest of the 10 year period. Similarly, foreign exchange reserves reacted negatively to a shock (trade deficit) in the trade of Sierra Leone. The Granger causality test results indicated a unidirectional causality between foreign exchange reserves and trade of Sierra Leone. The OLS results indicated that all the independent variables employed in the study except GDP were statistically significant to explain the dependent variable by a variation of about 89 percent. It is worth noting that all the variables used in the study have a retrogressive effect on foreign exchange reserves of Sierra Leone. It is therefore suggested that a vigorous industrialization process is embarked on to promote the export trade of Sierra Leone as a way of minimizing trade deficit as well as building up reserves.
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