The Exchange Rate Pass-Through to Inflation and its Implications for Monetary Policy in Cameroon and Kenya
Date
2020-09-03
Authors
Revelli, Dongue Ndongo Patrick
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Abstract
Understanding how domestic prices adjust to the exchange rate enables us to
anticipate the effects on inflation and monetary policy responses. This study examines
the extent of the exchange rate pass-through to the Consumer Price Index in Cameroon
and Kenya over the 1991-2013 period. The results of its econometric analysis shows
that the degree of the exchange rate pass-through is incomplete and varied between
0.18 and 0.58 over one year in Kenya, while it varied between 0.53 and 0.89 over
the same period in Cameroon. For the long term, it was found to be equal to 1.06 in
Kenya and to 0.28 in Cameroon. A structural VAR analysis using impulse-response
functions supported the results for the short term but found a lower degree of passthrough for the exchange rate shocks: 0.3125 for Kenya and 0.4510 for Cameroon. It
follows from these results that the exchange rate movements remain a potentially
important source of inflation in the two countries. Variance decomposition shows
that the contribution of the exchange rate shocks is modest in the case of Kenya but
significant in that of Cameroon.