Exchange Rate Pass-Through to Import Prices, Inflation and Monetary Policy in Nigeria

Abstract

The study investigates the impact of Exchange Rate Pass-through (ERPT) to import prices, Inflation, and monetary policy in Nigeria. Secondary data were used. The data covered the period of 1986-2012. Annual data on Nominal Effective Exchange Rate Index (NEER), Import Prices (IMP), Interest Rate (ITR), Money Supply (MS) and Inflation (INF) were sourced from the publication of the Central Bank of Nigeria (CBN) and Oil Price Index (OPI) were sourced from the World Development Indicators (WDI) published by the World Bank. The study applied Six-Variable VAR Model to estimate the Impulse Response Function (IRFs) and Variance Decomposition (VDCs). Based on SVAR analysis the study found that ERPT in Nigeria during the period under review is moderate, significant and persistent in the case of import prices and low and short lived in the case of inflation. The fact is that, ERPT was found to be incomplete and has useful implication to policymakers, especially in the design and implementation of exchange rate and monetary policy. Thus policy makers should take into account the incomplete response of import prices when they decide to devalue the currency so as to improve trade balance irrespective of several other factors which might determine the effectiveness of exchange rate policy (such as supply factors, elasticity of foreign and domestic demand, availability of substitutes etc ). To achieve this, the increased role of CBN will definitely require a carefully developed monetary policy and a strengthening of its institutional capacity.