Symmetric and Asymmetric Responses of Consumer Prices Index Inflation to Exchange Rates in Nigeria

The question whether domestic prices respond to either official exchange rate or parallel exchange rate movements is a key research issue, especially in an oil-dependent developing country such as Nigeria that has rising fiscal pressures and a vibrant parallel foreign exchange market. From the monetary authority perspective, it is also imperative to know if prices respond symmetrically and/or asymmetrically to both official and parallel exchange rate movements. Consequently, this study examines the response of domestic prices to both official and parallel exchange rate movements for the period POLICY BRIEF Symmetric and Asymmetric Responses of Consumer Prices Index Inflation to Exchange Rates in Nigeria Perekunah B. Eregha October 2023 / No.801 2 Policy Brief No.801 1995Q12019Q1 using Shin et. als (2014) non-linear ARDL approach. The results show that the magnitude of the effect of parallel exchange rates on domestic prices is more than that of the official exchange rates effect in a symmetric case. However, only domestic prices respond differently to the depreciation and appreciation of the official exchange rate in Nigeria. Consequently, the government needs to ensure some level of fiscal austerity, and possibly exchange rate unification when the premium grows too big, if the intention is to insulate domestic prices from fiscal pressures. Also, the Central Bank of Nigeria needs to be aware of a possible asymmetric relationship in their decisions to ensure price stability so that it does not distort monetary policy effects.