Domestic prices: does it exist for Nigeria?

Abstract

The study re-examined the transmission of exchange shock into domestic prices in Nigeria. The non-recursive Structural VAR methodology was employed to examine long-run pass-through of exchange rate to domestic inflation. It found from the result of the lRFs that exchange rate pass-through to domestic prices in Nigeria do exist; and is incomplete. The results further shows that the response of core inflation to shocks in nominal exchange rate was more pronounced and persistent over time than the headline inflation. Using FEVD, the study found that exchange rate and supply constraints are key drivers of domestic prices in Nigeria. The study therefore recommends proactive exchange rate policies that promote stability and induce non-tradable activities in the domestic economy. Also, the economy needs to be restructured in favour of exports and reduce importation of foreign goods.