Exchange Rate Pass-through and Inflation Dynamics in Selected Sub- saharan African Countries: A Panel NARDL Approach
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Date
2020-10
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A.A.U
Abstract
This study examines Exchange Rate Pass-Through and Inflation Dynamics in 14 Selected Sub-Saharan African Countries with special focus on the asymmetrical relationship between exchange rate and consumer prices. The study estimate exchange rate pass-through (ERPT) including the macroeconomic determinants of consumer prices by using the nonlinear autoregressive distributed lag (NARDL) framework of both time series, and panel fixed effect model taking in to account cross sectional dependence. The study findings suggests world oil price and output gap have significant effect in the long-run whereas the effect exchange rate depends on the direction and size of exchange rate changes. The study also reveals significant adjustment speed which converges to equilibrium slowly. The study found an asymmetrical ERPT in the entire sampled SSA and fixed exchange rate regime subgroups during the long-term, whereas symmetrical effect observed during short-term across subgroups. The result suggest complete and significant ERPT to consumer prices in the entire SSA region, which is higher during appreciation of the local currency than after depreciation in the long-term, especially in the fixed exchange rate regime subgroups. Further, the result confirms the non-zero incomplete ERPT over the short-term and the nonlinear ERPT with respect to the size of the exchange rate change. The pass-through is found to be higher in countries with fixed exchange rate regimes in a high inflationary environment than in countries with floating exchange rate regimes and low inflation levels which supports Taylor hypothesis. Pass-through is greater during small exchange rate changes than after large changes. Finally, the result of time series analysis suggests mixed result which demands country specific policy implications are inevitable. Therefore, the policy implication of both panel and time series analysis is to take in to account various asymmetries of exchange rate on consumer prices when formulating exchange rate and the monetary policy rules.
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Exchange Rate Pass-Through, Inflation; Asymmetries, NARDL; Sub-Saharan Africa