Exchange rate pass-through to domestic prices in Nigeria: an empirical investigation

Abstract

This paper uses the impulse response from an estimated structural autoregressive model of the inflation process to estimate the dynamic exchange rate pass-through to consumer prices for Nigeria, using quarterly data for the period 1986-20I0. The results suggest that the exchange rate pass-through is incomplete, low and fairly slow. On impact, for instance, the elasticity of inflation to exchange rate changes is about 0.02, and it takes about eight quarters to reach its full-impact of only 0.26. We argue that given the large share of imports in Nigeria's consumption basket, this surprisingly low pass-through indicates that importers practice the so-called pricing-to-market strategy of price setting for the Nigerian market. The variance decomposition analysis suggests that money supply has contributed more to Nigeria's inflation process relative to the exchange rate. This suggests that policy makers must beep up efforts at achieving monetary stability.