Exchange Rate Pass-Through and Inflation Dynamics in Nigeria: An Analysis of Macroeconomic Impacts and Policy Implications (2006-2023)
Olu Josiah John PhD, Prof Okowa Ezaal and Prof Nteegah Alwell
Abstract
This paper analyzed the foreign exchange pass-through to inflation in Nigeria for the period of 2006 to 2023. The exchange rate pass-through mechanisms into domestic prices were investigated by using the separately identification Structural Vector Auto Regressive (SVAR) model. The approach adopted in the analysis captures non-linearity and lags through ERPT, especially based on higher amplification ratios of consumer prices to exchange rate fluctuations after 2014. These studies showed proof that cost pull brought about by depreciations is highly costly to inflation and that monetary policy cannot fully address the problem of exchange rate impulses to inflation. The estimation via impulse response functions as well as the variance decomposition results signify not only the short-run and long-run effects of exchange rate fluctuations on inflation, but also increased responsiveness to foreign shocks and policy actions. More specifically the study raises awareness on the importance of exchange rate stability for managing inflation and calls for a synergy of fiscal, monetary and trade policies to address structures shocks. Plays recommended include appropriate controls of the nominal exchange rate, mechanisms of inflation targeting, the adoption of a flexible interest rate system and also better surveillance systems of the impacts of exchange rate shocks in order to reduce the impact of the shocks on consumer welfare, investment, and economic stability. JEL Classification: E31, F31, E52, F41
Keywords
References
Price, an empirical estimation of the degree of transmission from border to consumer
prices. Ministry of Planning and Development Discussion Paper No. 39.
Abiodun, A., Ajibola, D., Inuwa, S., Idowu, V., Sani, S., Anigwe, R., & Udoko, H. K. (2016).
Exchange rates and the consumer price index in Nigeria: A causality approach. Journal of
Emerging Trends in Economics and Management Sciences, 1(2), 114β120.
Adekunle, W., Tiamiyu, K. A., & Odugbemi, T. H. (2019). Exchange rate pass-through to
consumer prices in Nigeria: An asymmetric approach. Bingham Journal of Economics and
Allied Studies, 2(3), 1β11.
Akaike, H. (1974). A new look at the statistical model identification. IEEE Transactions on
Automatic Control, 19(6), 716β723.
Ahmed, S. (2021). Impact of money market interest rate spread on inflation. Journal of Banking
and Finance, 45(7), 201β215.
Ahmad, A., Siew-Voon, F., & Mark, Y. (2017). Exchange rate pass-through in Asian countries:
Do the inflation regimes, monetary policy regimes, and institutional quality matter? CEPII
Working Paper No. 07.
Amiti, M., Itskhoki, O., & Konings, J. (2014). Importers, exporters, and exchange rate disconnect.
American Economic Review, 104(7), 1942β1978.
Akram, M., & Qayyum, A. (2018). Exchange rate shocks and food inflation. Food Policy, 58(1),
37β48.
Akram, M., & Qayyum, A. (2020). More substantial impact of recent exchange rate policies on
inflation. Applied Economics, 30(1), 45β61.
Ari Aisen, Edson Manguinhane, & FΓ©lix F. Simione. (2021). An empirical assessment of the
exchange rate pass-through. IMF Working Papers.
Bada, A., Olufemi, A., Tata, I., Peters, I., Bawa, S., Onwubiko, A., & Onyowo, U. (2016).
Exchange rate pass-through to inflation in Nigeria. CBN Journal of Applied Statistics, 7(1),
49β70.
Bello, U. A., & Sanusi, A. R. (2019). Inflation dynamics and exchange rate pass-through in
Nigeria: Evidence from augmented nonlinear New Keynesian Philips curve. CBN Journal
of Applied Statistics, 10(2), 109β138.
Borensztein, E., & Heideken, V. Q. (2016). Exchange rate pass-through in South America. Inter-
American Development Bank (IDB) Working Paper Series No. IDB-WP-710.
Brown, M. (2017). Comprehensive analysis of exchange rate pass-through. International Finance
Review, 35(2), 189β215.
Brown, M., & Jones, A. (2018). Amplification of exchange rate shocks in recent economic
conditions. Journal of International Economics, 72(5), 871β893.
Cen, Z., et al. (2020). Economic policy shocks and inflation dynamics. Journal of Economic
Literature, 52(3), 789β802.
Chen, Z., et al. (2018). Quicker pass-through of recent exchange rate policies to consumers.
Journal of International Business Studies, 47(5), 345β367.
Colavecchio, R., & Rubene, I. (2020). Non-linear exchange rate pass-through to euro area
inflation: A local projection approach. Working Paper Series, No. 2362, ECB, Frankfurt
am Main.
Dario, I. J., Parsley, D., & Wei, S. (2020). Slow pass-through around the world: A new import for
developing countries? NBER Working Paper No. 1119965.
Ehsan, C. E., & Dalia, H. (2001). Exchange rate pass-through to domestic prices: Does the
inflationary environment matter? Journal of International Monetary and Finance, 614β
Feenstra, R. C., & Taylor, A. M. (2008). International economics. London: Macmillan.
Frimpong, S., & Anokye, M. A. (2010). Exchange rate pass-through in Ghana. International
Business Research, 3(2), 186β192.
Gagnon, L., & Ihrig, J. (2016). Interest rate movements and business costs. Economic Inquiry,
88(1), 154β172.
Gagnon, L., & Ihrig, J. (2016). Duration of pass-through effects of exchange rate shocks. Journal
of Economic Perspectives, 21(4), 89β103.
Garcia, R., & Rodriguez, M. (2018). Building up of exchange rate pass-through. International
Economic Review, 46(1), 321β339.
Garcia, R. (2020). Evolving dynamics of exchange rate pass-through to consumers. Economic
Inquiry, 77(2), 156β174.
Gencay, R., et al. (2017). Flexible and adaptive economic policies. Economic Policy Review, 54(4),
789β802.
Gencay, R., et al. (2019). Sectoral response to exchange rate shocks. Journal of International
Economics, 72(2), 451β470.
Hannan, E. J., & Quinn, B. G. (1979). The determination of the order of an autoregression. Journal
of the Royal Statistical Society: Series B (Methodological), 41(2), 190β195.
Hakan, H., & Fethi, J. K. (2008). Discuss the effects of adopting an inflation-targeting regime in
Turkey on the relationship between imported inflation and domestic inflation. Asian
Economics Letters, 1(1), 17389. https://doi.org/10.46557/001c.17389
Hassan, S., & Simione, F. (2013). Exchange rate determination under monetary policy rules in a
financially underdeveloped economy: A simple model and application to Mozambique.
Journal of International Development, 25(4), 502β519.
Helmy, O., Fayed, M., & Hussien, K. (2018). Exchange rate pass-through to inflation in Egypt: A
structural VAR approach. Review of Economics and Political Science, 3(2), 2β19.
Kassi, D., Rathnayake, D., Edjoukou, A., Gnangoin, Y., Louembe, P., Ding, N., & Sun, G. (2019).
Asymmetry in exchange rate pass-through to consumer prices: New perspective from Sub-
Saharan African countries. Economies, 7(5), 1β33.
Jasper, D., & Andrea, F. (2019). Examine the robustness of the Lerner symmetry result in an open
economy New Keynesian model that incorporates price rigidities. IMF Working Paper
WP/21/132.
Jiadan, & David. (2013). Towards a new monetary policy in China. Journal of Applied Business
and Economics, 21(6), 12β24.
Jongrim, H., Stocker, M., & Hakan, Y. (2020). Exchange rate pass-through inflation. Ici. Volume
105, July 2020, 102187. https://doi.org/10.1016/j.jimonfin.2020.102187
Johnson, L. (2021). Quicker pass-through of recent exchange rate policies to consumers. Journal
of Economic Behavior & Organization, 55(6), 1123β1145.
Johnson, P. (2019). Immediate responses to exchange rate shocks in well-regulated economies.
Review of Financial Studies, 61(4), 1025β1043.
Jones, A., et al. (2020). Exchange rate dynamics in developing countries: A longitudinal analysis.
Economic Journal, 78(3), 245β269.
Kehinde, A. Tiamiyu. (2022). Exchange rate pass-through to inflation: Symmetric and asymmetric
effects of monetary environment in Nigeria. Online at https://mpra.ub.uni-
muenchen.de/113223/.
Krugman, P. (1986). Pricing to the market when exchange rate changes. NBER Working Paper
No. 1926.
Kim, H., et al. (2021). Nuanced approach in response to changing economic conditions. Journal
of Economic Dynamics & Control, 58(9), 1123β1145.
Kim, H., et al. (2019). Quicker escalation of shocks to exchange rates in certain periods. Journal
of Economic Dynamics & Control, 40(8), 91β105.
Kim, H., et al. (2021). Business costs and investor confidence. Journal of Financial Markets,
45(3), 311β328.
Kilic, R. (2016). Regime-dependent exchange-rate pass-through to import prices. International
Review of Economics & Finance, 41(C), 295β308.
Lariau, A., El Said, M., & Takebe, M. (2016). An assessment of the exchange rate pass-through in
Angola and Nigeria. IMF Working Paper No. 16/191.
Lee, Y., & Ryu, J. (2020). Impact of exchange rate fluctuations on food prices. Agricultural
Economics, 42(6), 789β805.
Lee, Y., & Ryu, J. (2019). Immediate and pronounced effects of recent exchange rate policies on
food prices. Agricultural Economics, 32(2), 147β165.
Liu, Y., & Wang, H. (2019). Prolonged impact of shocks in certain periods. Journal of
International Money and Finance, 25(3), 489β503.
Liu, Y., & Wang, H. (2017). Cumulative effects of economic shocks on interest rates. Journal of
Economic Dynamics & Control, 48(2), 123β139.
Martina, J., Richhild, M., & Elod, T. (2019). Exchange rate pass-t