Examining The Degree Of Exchange Rate Pass-Through In Selected African Countries

The paper seeks to explore the premise that a shift to a more stabilized low-inflation regime as a result of monetary policy dynamics leads to a decline in the degree of exchange rate pass-through to consumer prices, dubbed, the Taylor’s hypothesis. In line with the trends in the empirical literature, the paper employs the dynamic Generalized Method of Moment (GMM) on quarterly data from 1981q1 to 2014q3 and covers a panel of sixteen African countries. Preliminary analysis subjects the panel data to multiple structural break tests as proposed by Bai and Perron (2003) which helps to identify policies related to stabilizing the policy environment. Panel pass-through model with structural dummies was estimated and findings confirm the famous Taylor’s hypothesis. Specifically, results show there is approximately 7 percent fall in the degree of exchange rate pass-through, suggesting a considerable reduction following monetary policy interventions. Guided by the findings of the paper, the policies adopted after 2010 seem to be more credible in stabilizing the environment and we therefore recommend that they should be sustained.