Exchange Rate Pass Through into Consumer Price Inflation in Nigeria: An Empirical Investigation

ABSTRACT The paper examines the macroeconomic shocks effect on exchange rate pass through into domestic consumer price inflation in the Nigerian economy between 1986Q1 and 2013Q1 using structural vector auto regression methodology. The results show that exchange rate pass through to consumer price inflation in Nigeria is low and incomplete. Moreover, the speed of adjustments to structural shocks, such as those from the exchange rate, output, monetary policy rate, and money supply is high. The effects of such shocks are highly volatile and therefore can potentially distort the status quo. The results from forecast variance decomposition analysis show that the consumer price inflation own shocks, positive money supply shocks and output shocks dominate over other factors in explaining consumer price inflation in the Nigerian economy. Therefore, Nigeria should strive for more effective monetary policy through conscious efforts by the monetary authority. The authority should adopt fully-fledged inflation targeting. This will help to bring expectations of inflation down and strengthen the expectations channel. This will in turn make the anticipated effects of monetary policy to require less aggressive monetary policy rate changes