Abstract
This paper examines the asymmetrical relationship between exchange rate and consumer prices in 40 sub-Saharan African (SSA) countries from 1990Q1 to 2017Q4. We estimate the exchange rate pass-through (ERPT) to consumer prices for each country by using the nonlinear autoregressive distributed lag (NARDL) framework and dynamic panel techniques robust to cross-sectional dependence. First, our findings suggest an asymmetrical ERPT in the SSA region during the short term, whereas there are mixed results across subregions in the long term. Second, the results of the panel analysis suggest incomplete and significant ERPT to consumer prices in the entire SSA region, which is higher during depreciation of the local currency than after appreciation in the short-term, especially in the CFA Franc zone. Third, we find nonlinear ERPT with respect to the size of the exchange rate. Finally, we find that pass-through is higher in countries with fixed exchange rate regimes (CFA franc zone) in a low inflationary environment than in countries with floating exchange rate regimes and high inflation levels. Pass-through is greater during large exchange rate changes than after small changes. Therefore, the policy implication is to consider these asymmetries and nonlinearities to improve monetary policy’s credibility, enhance trade liberalization, and promote competitive market structures in the SSA region.
Highlights
Interest in exchange rate pass-through analysis is justified by the need to understand how economic cycles, trade imbalances, and especially exchange rate changes affect domestic prices and monetary policy
The results confirm the existence of cross-sectional dependence between countries, since the p-values of these tests are less than conventional significance levels (1%, 5%, or 10%) and lead to rejection of the null hypothesis
This paper investigates the relationship between the exchange rate movements and the consumer price index in 40 sub-Saharan African (SSA) countries from Q1 1990 to Q4 2017 by employing the nonlinear autoregressive distributed lag (NARDL) approach as well as dynamic panel estimators under cross-sectional dependence analysis
Summary
Interest in exchange rate pass-through analysis is justified by the need to understand how economic cycles, trade imbalances, and especially exchange rate changes affect domestic prices and monetary policy. Most of these studies are at the country level and neglect the asymmetry and nonlinearity assumption between exchange rate changes and domestic prices in the SSA countries, as well as cross-sectional dependence across countries, which may lead to biased results. Kraay (1998) standard errors, which are consistent to heteroscedasticity and cross-sectionally correlated residuals These panel estimators validate both the short- and long-term asymmetrical ERPT for the CFA franc zone and the short-term asymmetrical ERPT for the other SSA countries and the entire region. Our findings of an incomplete and non-zero ERPT are robust across the SSA countries under the cross-sectional dependence analysis where depreciations are strongly passed through to consumer prices more than appreciations over the short and long term, especially in the CFA Franc zone. The remainder of this paper is structured as follows: Section 2 presents the literature on ERPT; Section 3 describes the data and the methodology used in this study; Section 4 presents the findings and discussion; and Section 5 provides the conclusion and policy implications
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
