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Exchange Rate Pass-Through to Import Prices, Inflation and Monetary Policy in Nigeria

Listed author(s):
  • M. O. Fatai
  • T. O. Akinbobola
Registered author(s):

    The study investigates the impact of Exchange Rate Pass-through (ERPT) to import prices, Inflation, and monetary policy in Nigeria. Secondary data were used. The data covered the period of 1986-2012. Annual data on Nominal Effective Exchange Rate Index (NEER), Import Prices (IMP), Interest Rate (ITR), Money Supply (MS) and Inflation (INF) were sourced from the publication of the Central Bank of Nigeria (CBN) and Oil Price Index (OPI) were sourced from the World Development Indicators (WDI) published by the World Bank. The study applied Six-Variable VAR Model to estimate the Impulse Response Function (IRFs) and Variance Decomposition (VDCs). Based on SVAR analysis the study found that ERPT in Nigeria during the period under review is moderate, significant and persistent in the case of import prices and low and short lived in the case of inflation. The fact is that, ERPT was found to be incomplete and has useful implication to policymakers, especially in the design and implementation of exchange rate and monetary policy. Thus policy makers should take into account the incomplete response of import prices when they decide to devalue the currency so as to improve trade balance irrespective of several other factors which might determine the effectiveness of exchange rate policy (such as supply factors, elasticity of foreign and domestic demand, availability of substitutes etc ). To achieve this, the increased role of CBN will definitely require a carefully developed monetary policy and a strengthening of its institutional capacity.

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    Article provided by Macrothink Institute in its journal International Finance and Banking.

    Volume (Year): 2 (2015)
    Issue (Month): 1 (June)
    Pages: 60-78

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    Handle: RePEc:mth:ifb888:v:2:y:2015:i:1:p:60-78
    Contact details of provider: Web page: http://ifb.macrothink.org

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    1. Feenstra, Robert C., 1989. "Symmetric pass-through of tariffs and exchange rates under imperfect competition: An empirical test," Journal of International Economics, Elsevier, vol. 27(1-2), pages 25-45, August.
    2. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," The Quarterly Journal of Economics, Oxford University Press, vol. 115(1), pages 147-180.
    3. 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.
    4. Jose Manuel Campa & Linda S. Goldberg, 2002. "Exchange Rate Pass-Through into Import Prices: A Macro or Micro Phenomenon?," NBER Working Papers 8934, National Bureau of Economic Research, Inc.
    5. Olajide S. Oladipo, 2012. "An analysis of sectoral exchange rate pass-through effects on a small open economy using the Leontief Input-Output technique," International Journal of Economic Policy in Emerging Economies, Inderscience Enterprises Ltd, vol. 5(1), pages 47-65.
    6. Barhoumi, Karim, 2006. "Differences in long run exchange rate pass-through into import prices in developing countries: An empirical investigation," Economic Modelling, Elsevier, vol. 23(6), pages 926-951, December.
    7. Michele Ca’ Zorzi & Elke Hahn & Marcelo Sánchez, 2007. "Exchange Rate Pass-Through in Emerging Markets," The IUP Journal of Monetary Economics, IUP Publications, vol. 0(4), pages 84-102, November.
    8. Anderton, Robert, 2003. "Extra-euro area manufacturing import prices and exchange rate pass-through," Working Paper Series 219, European Central Bank.
    9. Clarida, Richard & Gali, Jordi & Gertler, Mark, 1998. "Monetary policy rules in practice Some international evidence," European Economic Review, Elsevier, vol. 42(6), pages 1033-1067, June.
    10. Menon, Jayant, 1995. " Exchange Rate Pass-Through," Journal of Economic Surveys, Wiley Blackwell, vol. 9(2), pages 197-231, June.
    11. Ca' Zorzi, Michele & Hahn, Elke & Sánchez, Marcelo, 2007. "Exchange rate pass-through in emerging markets," Working Paper Series 739, European Central Bank.
    12. 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, vol. 25(4), pages 614-639, June.
    13. Barhoumi, Karim, 2006. "Exchange Rate Pass-Through and Structural Macroeconomic Shocks in Developing Countries: An Empirical Investigation," MPRA Paper 6573, University Library of Munich, Germany, revised 13 Oct 2007.
    14. Catherine L. Mann, 1986. "Prices, profit margins, and exchange rates," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Jun, pages 366-379.
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