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Exchange Rate Pass-through in Nigeria: Evidence from a Vector Error Correction Model

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  • Aliyu, Shehu Usman Rano
  • Yakub, Ma'aji Umar
  • Sanni, Ganiyu Kayode
  • Duke, Omolara

Abstract

The paper investigates the degree of exchange rate pass-through to import and consumer prices in Nigeria between 1986Q1 and 2007Q4 on the basis of vector error correction methodology. Results reveal that exchange rate pass-through in Nigeria is low, slightly higher in the import than in the consumer prices, significant and persistent. A one percent shock to exchange rate, for instance, results in 14.3 and -10.5 percent pass-through effect to import and consumer prices four quarters ahead, respectively. This, among other things, suggests that exchange rate pass-through in Nigeria declines along the price chain, and partly overturns the conventional wisdom in the literature that ERPT is always considerably higher in developing and emerging economies than in developed economies. Although pass-through effect is envisaged to increase with greater integration of the economy into the global world in future, but, the fact that it was found to be incomplete implies that prices react less proportionately to exchange shock in Nigeria and this is very useful to policymakers, especially in the design and implementation of monetary policy.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 25053.

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Date of creation: 10 Jun 2009
Date of revision: 29 Mar 2010
Handle: RePEc:pra:mprapa:25053

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Keywords: Exchange rate pass-through; cointegration; vector error correction; impulse responses; variance compositions;

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References

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  1. Hahn, Elke, 2003. "Pass-through of external shocks to euro area inflation," Working Paper Series 0243, European Central Bank.
  2. Burstein, Ariel Tomas & Eichenbaum, Martin & Rebelo, Sérgio, 2005. "Modeling Exchange Rate Passthrough After Large Devaluations," CEPR Discussion Papers 5250, C.E.P.R. Discussion Papers.
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  8. Pinelopi Koujianou Goldberg & Michael M. Knetter, 1997. "Goods Prices and Exchange Rates: What Have We Learned?," Journal of Economic Literature, American Economic Association, vol. 35(3), pages 1243-1272, September.
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  17. José Manuel Campa & Linda S. Goldberg, 2005. "Exchange Rate Pass-Through into Import Prices," The Review of Economics and Statistics, MIT Press, vol. 87(4), pages 679-690, November.
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Cited by:
  1. Ali Reza Kazerooni & Behzad Salmani & Majid Feshari, 2013. "The Impact of Monetary Regime on the Exchange Rate Pass-Through under Exchange Rate Volatility (Dynamic Panel Data Approach)," Iranian Economic Review, Economics faculty of Tehran university, vol. 18(2), pages 35-50, spring.

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