Exchange Rate Pass Through into Consumer Price Inflation in Nigeria: An Empirical Investigation

Ahmed Mohammed, Abdullahi (2016): Exchange Rate Pass Through into Consumer Price Inflation in Nigeria: An Empirical Investigation.

Abstract

ABSTRACT The paper examines the macroeconomic shocks effect on exchange rate pass through into domestic consumer price inflation in the Nigerian economy between 1986Q1 and 2013Q1 using structural vector auto regression methodology. The results show that exchange rate pass through to consumer price inflation in Nigeria is low and incomplete. Moreover, the speed of adjustments to structural shocks, such as those from the exchange rate, output, monetary policy rate, and money supply is high. The effects of such shocks are highly volatile and therefore can potentially distort the status quo. The results from forecast variance decomposition analysis show that the consumer price inflation own shocks, positive money supply shocks and output shocks dominate over other factors in explaining consumer price inflation in the Nigerian economy. Therefore, Nigeria should strive for more effective monetary policy through conscious efforts by the monetary authority. The authority should adopt fully-fledged inflation targeting. This will help to bring expectations of inflation down and strengthen the expectations channel. This will in turn make the anticipated effects of monetary policy to require less aggressive monetary policy rate changes.

• Item Type: MPRA Paper
• Language: English
• Keywords: Keywords: Macroeconomic shocks, ERPT, Inflation, Output shock, Structural VAR, Nigeria.
• Subjects: E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies

References

References

Aliyu, S.U.R., Yakub, M.U., Sanni, G.K. and Duke, O.O. (2009). “Exchange Rate Pass-Through in Nigeria: Evidence from a Vector Error Correction Model”, JEL Classification: F31, F41.

Adedayo, O. Adelowokan, (2012).” Exchange rate Pass through in Nigeria: A Dynamic Evidence” European Journal of Humanities, Vol.16

Bailliu, J., & Fujii, E. (2004).” Exchange rate pass-through and the inflation environment in industrialized Countries”: An empirical investigation. Bank of Canada, Working Paper 2004–21.

Bache, I. Wolden. (2007). “Econometrics of Exchange Rate Pass through”, Doctoral Dissertation in Economics, Norges Bank.

Bernanke, Ben. S. (1986). “Alternative explanations of the money-income correlation:” Carnegie-Rochester Conference Series on Public Policy, 25: 49–99.

Blanchard, Oliver J. and Danny Quah (1989). ‘The Dynamic Effects of Aggregate Demand and Supply Disturbances’, American Economic Review, 79(4): 655-673.

Campa, Jose and Linda Goldberg. (2005). “Distribution Margins, Imported Inputs, and the Insensitivity of the CPI to Exchange Rates” manuscript.

Campa, Jose and Linda Godlberg. (2002). “Exchange Rate Pass-through into import prices: a Macro or Micro Phenomenon”, NBER Working paper 8934, May.

Ca'zorzi, M, Hahn, E and Sanchez, M, (2007). “Exchange rate pass-through in emerging markets” European Central Bank Working Paper Series No. 739.

Choudhri, E. and Hakura, D. (2006). “Exchange Rate Pass-Through to Domestic Prices: Does the Inflationary Environment Matter”? Journal of International Money and Finance, 25, 614-639.

Choudhri, Ehsan U., and Dalia S. Hakura, (2001). “Exchange Rate Pass-Through to CPI: Does the Inflationary Environment Matter?” IMF Working Paper 01/194 (Washington: International Monetary Fund).

Faruqee. Hamid, (2004). “Measuring the Trade Effects of the EMU,”International Monetary Fund Working Paper WP/04/154.

Hyder, Z and Shah, S. (2004). “Exchange rate pass-through to domestic prices in Pakistan. State Bank of Pakistan Working Paper No.5.

Ito, T and Sato, Kiyatak. (2007). “Exchange Rate Pass Through and Domestic Inflation: A comparison Between East Asia and Latin American Countries” Research Institute of Economy, Trade and Industry, Papers Series 07-E-040

Lafleche, Thérèse (1996).” The Impact of Exchange Rate Movements on Consumer Prices”. Bank of Canada Review Winter 1996-1997, 21-32.

Lutkepohl, H. (1991). Introduction to Multiple Time Series Analysis. Berlin, Springer-Verlag.

Marazzi, Mario, Nathan Sheets, and Robert Vigfusson. (2005). “Exchange Rate Pass Through to US Import Prices: Some New Evidence”, Federal Reserve Board of Governors, International Finance Discussion Paper no: 833, April.

MacKinnon, James. G. (2005). “Bootstrap Methods in Econometrics” Department of Economics Queen’s University Kingston, Ontario, Canada, http://www.econ.queensu.ca/faculty/mackinnon/ K7L 3N6.

McCarthy, Jonathan. (2000). “Pass-Through of Exchange Rates and Import Prices to Domestic Inflation in Some Industrialized Economies”. Federal Reserve Bank of New York Staff Report No; 111 (September).

Mwase, N. (2006). "An Empirical Investigation of the Exchange Rate Pass-through to Inflation in Tanzania." IMF Working Paper 150.

Mohammed A. A (2015). “Exchange Rate Pass-Through to Domestic Consumer Prices in Nigeria and Taylor’s Hypothesis: A Structural Vector Auto Regression Anaysis”

Razafimahefa, I.F. (2012). “Exchange rate pass-through in sub-Saharan African economies and its determinants”, IMF Working Papers, WP/12/141, International Monetary Fund.

Mustapha H, Mohammed A.A and Mati. S et al. (2017). “Oil and Non-Oil Foreign Direct Investment and Economic Growth in Nigeria: An Empirical Evidence from Autoregressive Distributed Lag Model” American Journal of Economics, 7(4): 194-200 DOI: 10.5923/j.economics.20170704.05

Sahminan, (2002). “Exchange Rate Pass-Through into Import Prices: Empirical Evidences from Some Southeast Asian Countries” Mimeo.

Sanusi, A. R. (2010). “Exchange Rate Pass Through To Consumer Prices In Ghana: Evidence from Structural Vector Auto Regression” MPRA Paper, No, 29491 March 2011.

Smets, F., Wouters, R. (2007). Shocks and frictions in US Business cycles: A Bayesian DSGE approach. The American Economic Review 97(3), 586–606

Takhtamanova, Y. (2008). “Understanding Changes in Exchange Rate Pass-Through Federal Reserve Bank of San Francisco” Working Paper 2008-13 Federal Reserve Bank of San Francisco, San Francisco.

Taylor, John B. (2000). “Low Inflation, Pass-Through, and the Pricing Power of Firms” European Economic Review, June volume 44 issue 7 pp. 1389-1408.