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The Asymmetric Effect Of Exchange Rate Pass-Through To Domestic Prices: Evidence From Nigeria

Author

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  • Alarudeen Aminu
  • Joshua Adeyemi Afolabi

Abstract

The linear relationship between exchange rates and domestic prices has been extensively researched but little is known about their asymmetric relationship, particularly in Nigeria. This study examined nominal exchange rate passthrough to domestic prices using the official and parallel market exchange rates. The non-linear autoregressive distributed lag (NARDL) estimation technique was adopted to analyse data of relevant variables from 2011M1 to 2021M3. The results showed that the parallel market exchange rate, not the official exchange rate, is the driver of domestic prices in Nigeria due to the huge discrepancies in the two rates, which economic agents exploit to their advantage. The Wald test results confirmed the existence of short-run asymmetry between parallel market exchange rates and domestic prices in Nigeria. This suggests the need for the Nigerian monetary authorities to close the gap between the official and parallel market exchange rates to minimise arbitrage.

Suggested Citation

  • Alarudeen Aminu & Joshua Adeyemi Afolabi, 2024. "The Asymmetric Effect Of Exchange Rate Pass-Through To Domestic Prices: Evidence From Nigeria," Economic Annals, Faculty of Economics and Business, University of Belgrade, vol. 69(243), pages 117-141, October –.
    • Handle: RePEc:beo:journl:v:69:y:2024:i:243:p:117-141
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    More about this item

    Keywords

    exchange rate passthrough; domestic prices; Central Bank of Nigeria; parallel market; non-linear autoregressive distributed lag.;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • N27 - Economic History - - Financial Markets and Institutions - - - Africa; Oceania

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