Exchange Rate Pass-Through and Inflation Dynamics in Nigeria: An Analysis of Macroeconomic Impacts and Policy Implications (2006-2023)
Abstract
This paper analyzed the foreign exchange pass-through to inflation in Nigeria for the period of 2006 to 2023. The exchange rate pass-through mechanisms into domestic prices were investigated by using the separately identification Structural Vector Auto Regressive (SVAR) model. The approach adopted in the analysis captures non-linearity and lags through ERPT, especially based on higher amplification ratios of consumer prices to exchange rate fluctuations after 2014. These studies showed proof that cost pull brought about by depreciations is highly costly to inflation and that monetary policy cannot fully address the problem of exchange rate impulses to inflation. The estimation via impulse response functions as well as the variance decomposition results signify not only the short-run and long-run effects of exchange rate fluctuations on inflation, but also increased responsiveness to foreign shocks and policy actions. More specifically the study raises awareness on the importance of exchange rate stability for managing inflation and calls for a synergy of fiscal, monetary and trade policies to address structures shocks. Plays recommended include appropriate controls of the nominal exchange rate, mechanisms of inflation targeting, the adoption of a flexible interest rate system and also better surveillance systems of the impacts of exchange rate shocks in order to reduce the impact of the shocks on consumer welfare, investment, and economic stability.