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Exchange Rate Pass-through in Countries of the Proposed West African Monetary Zone (WAMZ)

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  • Mustapha Ibn Boamah

    ()
    (Department of Social Science, University of New Brunswick, Saint John, Canada)

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    Abstract

    This paper examines the extent and speed of exchange rate pass-through to inflation in countries of the proposed West African monetary zone. Using monthly data starting from 2000:01 - the year the monetary zone was proposed ¨C to 2011:12 and utilising impulse response and variance decomposition functions within a vector autoregressive framework, the paper finds that exchange rate dynamics have a direct impact on headline inflation in these countries. The results show varying degrees of the extent and speed of exchange rate pass-through to headline inflation that policy makers need to mindful of in the proposed monetary union. The extent of pass-through is highest in Ghana and lowest in Nigeria. Also, except for Ghana where pass-through persisted, it died down in 12 months in the other member countries. Variance decomposition shows that the relative importance of exchange rate dynamics in explaining domestic prices is higher for Guinea and Ghana and those prices are largely driven by their dynamics among members of the proposed monetary zone.

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    Bibliographic Info

    Article provided by Better Advances Press, Canada in its journal Review of Economics & Finance.

    Volume (Year): 3 (2013)
    Issue (Month): (February)
    Pages: 74-82

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    Handle: RePEc:bap:journl:130107

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    Related research

    Keywords: Exchange rate pass-through; Headline inflation; WAMZ countries;

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    1. Frankel, Jeffrey A. & Wei, Shang-jin & Parsley, David, 2012. "Slow Pass-through Around the World: A New Import for Developing Countries?," Scholarly Articles, Harvard Kennedy School of Government 10494212, Harvard Kennedy School of Government.
    2. Serena Ng & Pierre Perron, 2001. "LAG Length Selection and the Construction of Unit Root Tests with Good Size and Power," Econometrica, Econometric Society, Econometric Society, vol. 69(6), pages 1519-1554, November.
    3. Choudhri, Ehsan U. & Hakura, Dalia S., 2006. "Exchange rate pass-through to domestic prices: Does the inflationary environment matter?," Journal of International Money and Finance, Elsevier, Elsevier, vol. 25(4), pages 614-639, June.
    4. Bhargava, Alok, 1986. "On the Theory of Testing for Unit Roots in Observed Time Series," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 53(3), pages 369-84, July.
    5. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, Econometric Society, vol. 49(4), pages 1057-72, June.
    6. Joseph E. Gagnon & Jane Ihrig, 2004. "Monetary policy and exchange rate pass-through This article is a U.S. Government work and is in the public domain in the U.S.A," International Journal of Finance & Economics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 9(4), pages 315-338.
    7. Alagidede, Paul & Coleman, Simeon & Cuestas, Juan Carlos, 2012. "Inflationary shocks and common economic trends: Implications for West African monetary union membership," Journal of Policy Modeling, Elsevier, Elsevier, vol. 34(3), pages 460-475.
    8. Elliott, Graham & Rothenberg, Thomas J & Stock, James H, 1996. "Efficient Tests for an Autoregressive Unit Root," Econometrica, Econometric Society, Econometric Society, vol. 64(4), pages 813-36, July.
    9. Taylor, John B., 2000. "Low inflation, pass-through, and the pricing power of firms," European Economic Review, Elsevier, Elsevier, vol. 44(7), pages 1389-1408, June.
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