The report, titled “Exchange Rate Pass-Through to Domestic Prices in
Nigeria: An Empirical Investigation”, was published by the Central Bank
of Nigeria (CBN) in the Economic and Financial Review.
Stack of naira notes.(CBN)
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Stack of naira notes.(CBN)
A report on the impact of
exchange rates on domestic prices has suggested that a floating exchange
rate be created for the naira.
The report, titled “Exchange Rate Pass-Through to Domestic Prices in Nigeria: An Empirical Investigation”, was published by the Central Bank of Nigeria (CBN) in the Economic and Financial Review.
It reads:
“The
major finding is that, in line with Aliyu et al., (2009), exchange rate
pass-through in Nigeria is incomplete and low. This is in contrast with
the findings of Essien (2005) who found that the pass- through is
complete in the long run. Secondly, the total impact is attained after
eight quarters, suggesting that it is quiet slow.”
“This
is consistent with the literature on African countries, for example
Ghana as found in Sanusi (2010). One interpretation of this low and slow
exchange rate pass-through is that exporters to Nigeria practice a
substantial degree of pricing-to-market strategy. Instead of allowing
the naira price of their products to vary whenever there are changes in
the exchange rate, these firms allow their mark-ups to vary as they
change their local currency prices in the opposite direction of the
change in exchange rate.”
“We argue that this is
plausible in Nigeria being a large market for fairly all its imported
commodities. Firms would therefore strive to keep their competitive
advantage in the domestic market as exchange rate changes. This explains
the low pass-through observed.”
“One implication
of this finding is that the cost of true float may not be as large as it
would under complete pass-through. There is therefore a good potential
for de facto float, since only a small fraction of the excessive
variations in the exchange rate that such a regime would entail will be
passed onto inflation. In other words, the fear of floating that the
authorities exhibit in Nigeria may be unfounded.”
The study was conducted by economic experts Abdulrasheed Zubair, George Okorie and Aliyu R. Sanusi.
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