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The role of announced exchange rate policies on exchange rate pass-through to consumer prices in an oil-based small open economy

Author

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  • Jamilu Iliyasu

    (Ahmadu Bello University)

  • Aliyu Rafindadi Sanusi

    (Ahmadu Bello University)

Abstract

Most central banks have now recognised price stability as the ultimate goal of monetary policy. In a small open economy with a liberalised capital account and a form of flexible exchange rate regime, achieving price stability requires lowering the exchange rate's impact on consumer prices. In this spirit, this study investigates the role of announced exchange rate policy on the exchange rate pass-through to consumer prices in Nigeria using a structural VAR identified with sign-and-zero restriction. Overall, the study finds that when exchange rate policy interventions were anticipated through an announcement, the exchange rate pass-through to inflation tends to reduce by 12.81% (7.3ppts) from 57 to 49.7%. The estimates also indicate that the exchange rate pass-through in Nigeria is incomplete, moderate, and slow. This suggests that when exchange rate depreciation is well-anticipated, interventions that allow the exchange rate to depreciate will lead to lower inflation than a similar depreciation that is unanticipated. Therefore, one policy implication of these findings is that, in the face of external shocks when exchange rate depreciation is well-anticipated, allowing depreciation can forestall further reserve losses at a lower inflationary cost than similar unexpected depreciation would deliver. The results also imply that effective communication can reduce exchange rate pass-through to consumer prices in Nigeria.

Suggested Citation

  • Jamilu Iliyasu & Aliyu Rafindadi Sanusi, 2023. "The role of announced exchange rate policies on exchange rate pass-through to consumer prices in an oil-based small open economy," SN Business & Economics, Springer, vol. 3(1), pages 1-20, January.
    • Handle: RePEc:spr:snbeco:v:3:y:2023:i:1:d:10.1007_s43546-022-00391-3
    DOI: 10.1007/s43546-022-00391-3
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    More about this item

    Keywords

    Exchange rate pass-through; Inflation; Announcement effects; Sign-restricted Bayesian VAR; Sign-and-zero restricted Bayesian VAR;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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