IDEAS home Printed from https://ideas.repec.org/a/taf/oaefxx/v12y2024i1p2344720.html
   My bibliography  Save this article

Testing the non-linearities of exchange rate pass-through in Somalia: does dollarization affect consumer prices?

Author

Listed:
  • Abdikafi Hassan Abdi
  • Abdimalik Ali Warsame
  • Ibrahim Abdukadir Sheik-Ali

Abstract

Over the past three decades, Somalia’s economic landscape has witnessed a noticeable dependence on imported goods. The exchange rate was unregulated owing to the collapse of the country’s central bank. This unregulated environment has introduced significant volatility in exchange rates, profoundly impacting consumer prices and fostering a prevalent shift towards the utilization of the US dollar in economic transactions. Hence, this undertaking delves into the asymmetric effects of exchange rates on consumer prices in the presence of dollarization in Somalia from 1995 to 2019. Employing both linear and nonlinear autoregressive distributed lag (NARDL) cointegration methodologies, we explore the short-run and long-run dynamics between exchange rates and consumer price levels. The long-run empirical results from the NARDL demonstrate asymmetrical cointegration between the unregulated exchange rate and inflation in Somalia. Both appreciation and depreciation of exchange rates exert differing impacts on consumer prices, with depreciation exhibiting a more pronounced effect. In addition, the evidence suggests that the exchange rate pass-through is incomplete in Somalia regarding its inelastic coefficient. Oil prices exhibit a substantial and statistically significant association with inflation, both in the long-run and short-run, while GDP remains inconsequential. In the short-run, the most remarkable outcome indicates that dollarization significantly contributes to mitigating inflationary pressures. Based on our empirical insights, the central bank should enhance regulatory oversight of the foreign exchange market by strictly controlling and prohibiting the issuance of counterfeit banknotes to achieve price stability.This research comprehensively analyzes the complex dynamics between exchange rate fluctuations and consumer prices in Somalia, revealing a pronounced asymmetry. Through sophisticated modeling, the study demonstrates that exchange rate depreciations significantly impact inflation more than appreciations, a finding critical for effective monetary policy in dollarized economies like Somalia. The findings indicate the need for robust regulatory frameworks to mitigate the adverse effects of exchange rate fluctuations on the economy. This work is instrumental for policymakers, providing evidence-based recommendations to enhance regulatory measures aimed at stabilizing prices and managing inflationary pressures. Additionally, it contributes to the broader economic literature by detailing the unique challenges and strategies relevant to managing economies with significant dollarization.

Suggested Citation

  • Abdikafi Hassan Abdi & Abdimalik Ali Warsame & Ibrahim Abdukadir Sheik-Ali, 2024. "Testing the non-linearities of exchange rate pass-through in Somalia: does dollarization affect consumer prices?," Cogent Economics & Finance, Taylor & Francis Journals, vol. 12(1), pages 2344720-234, December.
  • Handle: RePEc:taf:oaefxx:v:12:y:2024:i:1:p:2344720
    DOI: 10.1080/23322039.2024.2344720
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1080/23322039.2024.2344720
    Download Restriction: Access to full text is restricted to subscribers.

    File URL: https://libkey.io/10.1080/23322039.2024.2344720?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:taf:oaefxx:v:12:y:2024:i:1:p:2344720. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Longhurst (email available below). General contact details of provider: http://www.tandfonline.com/OAEF20 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.