Examination of the Exchange Rate and Import Price Pass-through to Inflation: A View from Nigeria

Abstract

<jats:title>Abstract</jats:title> <jats:p>We examine the effect of exchange rate and import price pass-through to inflation in Nigeria using headline inflation and import price data, with the aid of a non-recursive Structural Vector Autoregression model. Our results indicate mostly incomplete ERPT and IPPT to inflation. Specifically, we found that (i) the ERPT to the INF is incomplete at all horizons. (ii) IPPT to the INF is incomplete at all horizons. (iii) IPPT to inflation is relatively more rapid than the ERPT to inflation. The findings further suggest that the monetary authority should be wary of using devaluation of the domestic currency as a way of propping up the economy as that would not only aggravate domestic inflation but likely to also increase the ERPT. Similarly, harmonizing the disparate exchange rate windows in the economy might reduce import price pass-through to domestic inflation. Also, the size and speed of both ERPT and IPPT from the study suggest that relevant authorities need to strengthen domestic industries and instill confidence in consumers, to reduce reliance on imports.JEL Classification: C32; E31; F31; 055</jats:p>

Exchange Rate Pass-Through to Import and Consumer Prices in Nigeria

“…The coefficients of the exchange rate, which are less than one, suggest that ERPT to import and consumer prices is incomplete, indicating that changes in exchange rates are not entirely mirrored in the prices of imported goods and services and in the prices paid by consumers. The present findings are consistent with prior research conducted by [30][31][32][33], which similarly reported an incomplete ERPT effect on consumer prices in Nigeria. Empirical evidence suggests that the elasticity of ERPT to import prices is greater than that of ERPT to consumer prices.…”