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Exchange Rate Pass-through to Inflation: Evidence from Generalized Autoregressive Conditional Heteroscedasticity (GARCH) Model in Nigeria

Author

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  • Johnbosco Chukwuma Ozigbu

    (Rivers State University, Port Harcourt, Nigeria.)

Abstract

Motivated by the rising general price level amidst varying exchange rate, this paper modeled the exchange rate pass-through to inflation in Nigeria, disaggregating the exchange rate into Bureau de Change (parallel market) exchange rate and the official exchange rate. Monthly time series data that cover the period of 2006M01 to 2021M4 was used for this study and sourced from the Central Bank of Nigeria (CBN) Statistical Bulletin and the International Monetary Fund. The study employed the econometric technique generalized autoregressive conditional heteroscedasticity (GARCH) and both Bureau de Change and official exchange rate do not pass-through to inflation in the short run. At the same time, the volatility of both the parallel market and official exchange rate negatively affect inflation in Nigeria. The negative impact is inelastic because a 1 per cent increase in the parallel market exchange rate volatility would lead to a less than proportionate decrease in inflation by about 0.085. Similarly, there would be a less than proportionate decrease in inflation by about 0.054 following a 1 per cent rise in official exchange rate volatility. The result further revealed that the volatility is not persistent as the sum of the ARCH and GARCH coefficients is less than one. Given the findings, the study recommends consistent exchange rate management policy in the managed-float system alongside structural transformations to mitigate the structural problems that may transmit to inflation in Nigeria.

Suggested Citation

  • Johnbosco Chukwuma Ozigbu, 2021. "Exchange Rate Pass-through to Inflation: Evidence from Generalized Autoregressive Conditional Heteroscedasticity (GARCH) Model in Nigeria," Post-Print hal-05188070, HAL.
    • Handle: RePEc:hal:journl:hal-05188070
    as

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