Exchange rate pass-through effects on consumer price inflation and macroeconomic shocks in Nigeria

Purpose — The objective of this research is to reassess the elasticity of exchange rate pass-through, recompute the exchange-rate pass-through elasticity, and examine inflation dynamics in the Nigerian economy.Methods — The paper uses a structural vector autoregression (SVAR) model to examine the effect of macroeconomic shocks on exchange-rate pass-through to domestic consumer price inflation, using data from 1986 to 2021. Findings — The results show that exchange-rate pass-through to consumer price inflation in Nigeria is low and incomplete. Moreover, the speed of adjustment to structural shocks, such as exchange rate, output, monetary policy rate, and the money supply, is fast. The effects of such shocks are highly volatile and therefore can potentially distort the status quo. Implication — The forecast variance decomposition results show that consumer price inflation own shocks, positive money supply shocks, and output shocks dominate other factors in explaining consumer price inflation in the Nigerian economy. Therefore, Nigeria should pursue more effective monetary policy through deliberate action by the monetary authority. The authorities should adopt a fully-fledged inflation-targeting framework. Originality — In this study, we use SVAR to identify the structural exchange rate shock and the monetary policy transmission channel, guided by ex-ante, theory-justified restrictions. The SVAR methodology enables us of use impulse response functions to compute exchange rate pass-through elasticity and inflation dynamics.