Exchange Rate Pass-Through Effect and Inflation Dynamics in Nigeria

Abstract

This paper examined the exchange rate pass-through effect on inflation in Nigeria using quarterly data from 1995Q1 to 2023Q4. The data was analyzed using the fully modified ordinary least squares (FMOLS) and the vector autoregression (VAR) with accompanying impulse response function. The VAR model incorporated two lags with exchange rate, import prices, crude oil price, and real output growth being the variables within the system. Findings from the FMOLS technique of estimation indicated that both exchange rate and import prices exerted positive and significant effect on the consumer price index in Nigeria. This implies that both exchange rate and import prices are key drivers of inflationary pressure within the Nigerian economy. However, crude oil prices exerted a negative and significant effect on the consumer price index in Nigeria.