Exchange Rate Pass-through to Import and Consumer Prices: Evidence from Ethiopia

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The fact that Ethiopia adopted managed floa ting exchange rate pol icy since 1992 as wcll as various trade reform measures taken makes the country's import and consumer prices susceptible to the effects of exchange rate movements. Thus, the study invcstigates thc degree of ERPT and its asymmetry to import and consumer priccs in Ethiopia bctwcen 199 1/92 and 201011 1 using two types of VAR models (SVAR and CVAR). Based on SVAR analysis the paper found that ERPT in Ethiopia during thc period under review is moderate, significant and persistent in the case of import price and low and short livcd in the case of consumer prices. The co integration analys is shows incomplctc ERP"), to import price and absence of pass-through to consumcr price in the long run. The rcsult obtained from the asymmetric model suggests that ERPT to import prices is highcr in periods of Birr depreciation than appreciation. Also, pass-tluough to import prices is found to be higher in periods of small changes than large changes in the cxchange ratc. The study also tries to get pass-through estimates in different inflation environments jn order to test Taylor's hypothesis. However, no evidence is found wllich supports thc hypothes is in the case of Ethiopia. The fact that ERPT was found to be incomplete has use[-ul implication to policymakers, especially in thc dcsign and implementation of exchange rate and monetary policy



Exchange Rate Pass-Through to Import and Consumer