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

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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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Consumer price; Food price; Official exchange rate; Parallel exchange rate; Non-linear Autoregressive Distributed Lag.
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