ASYMMETRIC EXCHANGE RATE PASS-THROUGH TO INFLATION IN SIERRA LEONE: EVIDENCE FROM A NONLINEAR ARDL MODEL
Abstract
This article examines asymmetric exchange-rate pass-through to inflation in Sierra Leone using annual data for 1980–2024 and a Nonlinear Autoregressive Distributed Lag model (NARDL). The analysis separates depreciation from appreciation in order to test whether exchange rate losses and gains transmit differently to domestic prices, while controlling for money supply, petroleum import prices and real GDP. Unit-root results show a combination of I(0) and I(1) variables, supporting the NARDL approach, and the bounds test confirms a long-run relationship among the variables. The long-run estimates indicate that money supply and petroleum import prices are the main determinants of inflation, whereas the long-run asymmetric exchange rate effects are not statistically significant. In the short run, depreciation raises inflation more strongly than appreciation reduces it, and this asymmetric response is supported by the Wald test and dynamic multiplier evidence. The findings suggest that inflation control in Sierra Leone requires exchange rate stability, prudent liquidity management, lower exposure to imported fuel and stronger domestic production capacity. JEL: E31; F31; F41; C32; O55