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Exchange Rate Pass Through into Consumer Price Inflation in Nigeria: An Empirical Investigation

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  • Ahmed Mohammed, Abdullahi

Abstract

ABSTRACT The paper examines the macroeconomic shocks effect on exchange rate pass through into domestic consumer price inflation in the Nigerian economy between 1986Q1 and 2013Q1 using structural vector auto regression methodology. The results show that exchange rate pass through to consumer price inflation in Nigeria is low and incomplete. Moreover, the speed of adjustments to structural shocks, such as those from the exchange rate, output, monetary policy rate, and money supply is high. The effects of such shocks are highly volatile and therefore can potentially distort the status quo. The results from forecast variance decomposition analysis show that the consumer price inflation own shocks, positive money supply shocks and output shocks dominate over other factors in explaining consumer price inflation in the Nigerian economy. Therefore, Nigeria should strive for more effective monetary policy through conscious efforts by the monetary authority. The authority should adopt fully-fledged inflation targeting. This will help to bring expectations of inflation down and strengthen the expectations channel. This will in turn make the anticipated effects of monetary policy to require less aggressive monetary policy rate changes.

Suggested Citation

  • Ahmed Mohammed, Abdullahi, 2016. "Exchange Rate Pass Through into Consumer Price Inflation in Nigeria: An Empirical Investigation," MPRA Paper 86515, University Library of Munich, Germany, revised 12 Oct 2016.
    • Handle: RePEc:pra:mprapa:86515
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    File URL: https://mpra.ub.uni-muenchen.de/86515/10/MPRA_paper_86515.pdf
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    References listed on IDEAS

    as
    1. 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.
    2. Mr. Hamid Faruqee, 2004. "Measuring the Trade Effects of EMU," IMF Working Papers 2004/154, International Monetary Fund.
    3. Miss Nkunde Mwase, 2006. "An Empirical Investigation of the Exchange Rate Pass-Through to Inflation in Tanzania," IMF Working Papers 2006/150, International Monetary Fund.
    4. 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.
    5. Jon Faust & Joseph E. Gagnon & Mario Marazzi & Jaime R. Marquez & Robert F. Martin & Trevor A. Reeve & John H. Rogers & Nathan Sheets & Robert J. Vigfusson, 2005. "Exchange rate pass-through to U.S. import prices: some new evidence," International Finance Discussion Papers 833, Board of Governors of the Federal Reserve System (U.S.).
    6. Blanchard, Olivier Jean & Quah, Danny, 1989. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," American Economic Review, American Economic Association, vol. 79(4), pages 655-673, September.
    7. 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.
    8. Aliyu, Shehu Usman Rano & Yakub, Ma'aji Umar & Sanni, Ganiyu Kayode & Duke, Omolara, 2009. "Exchange Rate Pass-through in Nigeria: Evidence from a Vector Error Correction Model," MPRA Paper 25053, University Library of Munich, Germany, revised 29 Mar 2010.
    9. Zulfiqar Hyder & Sardar Shah, 2004. "Exchange Rate Pass-Through to Domestic Prices in Pakistan," SBP Working Paper Series 05, State Bank of Pakistan, Research Department.
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    Cited by:

    1. Ahmed Mohammed, Abdullahi, 2023. "Essay on the Philosophy of Islamic Economics," MPRA Paper 119630, University Library of Munich, Germany, revised 20 Dec 2023.

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    Keywords

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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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