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

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

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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File URL: http://mpra.ub.uni-muenchen.de/25053/1/MPRA_paper_25053.pdf
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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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  1. Philippe Bacchetta & Eric van Wincoop, 2002. "Why Do Consumer Prices React less than Import Prices to Exchange Rates ?," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 02.18, Université de Lausanne, Faculté des HEC, DEEP.
  2. Campa, Jose M. & Goldberg, Linda S., 2002. "Exchange rate pass-through into import prices: A macro or micro phenomenon?," IESE Research Papers D/475, IESE Business School.
  3. Ariel Burstein & Martin Eichenbaum & Sergio Rebelo, 2005. "Large Devaluations and the Real Exchange Rate," Journal of Political Economy, University of Chicago Press, vol. 113(4), pages 742-784, August.
  4. Jane E. Ihrig & Mario Marazzi & Alexander D. Rothenberg, 2006. "Exchange-rate pass-through in the G-7 countries," International Finance Discussion Papers 851, Board of Governors of the Federal Reserve System (U.S.).
  5. Burstein, Ariel & Eichenbaum, Martin & Rebelo, Sergio, 2007. "Modeling exchange rate passthrough after large devaluations," Journal of Monetary Economics, Elsevier, vol. 54(2), pages 346-368, March.
  6. 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.
  7. Michael B. Devereux & Charles Engel, 2001. "Endogenous Currency of Price Setting in a Dynamic Open Economy Model," NBER Working Papers 8559, National Bureau of Economic Research, Inc.
  8. Hahn, Elke, 2003. "Pass-through of external shocks to euro area inflation," Working Paper Series 0243, European Central Bank.
  9. Fagan, Gabriel & Henry, Jérôme & Mestre, Ricardo, 2001. "An area-wide model (AWM) for the euro area," Working Paper Series 0042, European Central Bank.
  10. Ki-Ho Kim, 1998. "US inflation and the dollar exchange rate: a vector error correction model," Applied Economics, Taylor & Francis Journals, vol. 30(5), pages 613-619.
  11. Giovanni P. Olivei, 2002. "Exchange rates and the prices of manufacturing products imported into the United States," New England Economic Review, Federal Reserve Bank of Boston, issue Q 1, pages 3 - 18.
  12. Kim, Yoonbai, 1991. "External Adjustments and Exchange Rate Flexibility: Some Evidence from U.S. Data," The Review of Economics and Statistics, MIT Press, vol. 73(1), pages 176-81, February.
  13. David Romer, 1991. "Openness and inflation: theory and evidence," Proceedings, Federal Reserve Bank of San Francisco, issue Nov.
  14. 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.
  15. Feinberg, Robert M, 2000. "The Role of International Discipline in Three Developing Economies: Exchange Rate Effects on Domestic Prices in Colombia, Korea, and Morocco," Review of International Economics, Wiley Blackwell, vol. 8(1), pages 126-33, February.
  16. Jonathan McCarthy, 2007. "Pass-Through of Exchange Rates and Import Prices to Domestic Inflation in Some Industrialized Economies," Eastern Economic Journal, Eastern Economic Association, vol. 33(4), pages 511-537, Fall.
  17. Pinelopi K. Goldberg & Michael M. Knetter, 1996. "Goods Prices and Exchange Rates: What Have We Learned?," NBER Working Papers 5862, National Bureau of Economic Research, Inc.
  18. Menon, Jayant, 1995. " Exchange Rate Pass-Through," Journal of Economic Surveys, Wiley Blackwell, vol. 9(2), pages 197-231, June.
  19. Joseph E. Gagnon & Jane Ihrig, 2001. "Monetary policy and exchange rate pass-through," International Finance Discussion Papers 704, Board of Governors of the Federal Reserve System (U.S.).
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