Symmetric and Asymmetric Responses of Consumer Prices Index Inflation to Exchange Rates in Nigeria
Date
2022-06
Authors
Eregha, Perekunah B.
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Abstract
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 1995.1–2019.1 using Shin et al’s (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 rate’s 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 its decisions to ensure price stability so that it does not
distort monetary policy effects.
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Keywords
Consumer price; Food price; Official exchange rate; Parallel exchange rate; Non-linear Autoregressive Distributed Lag.