ESTIMATING EXCHANGE RATE PASS-THROUGH TO DOMESTIC PRICES; SIERRA LEONE EXPERIENCE

Abstract

<p>The study conducts an investigation that seeks to evaluate the nature of exchange rate pass-through on consumer prices in Sierra Leone. As a small, open economy, the country is susceptible to exogenous shocks. The exchange rate acts as a medium through which external shocks get transmitted to the real economy. Therefore, the general objective of the study is to assess the effect of the fluctuation of the exchange rate on domestic prices in Sierra Leone. More specifically, it sought to determine which type of exchange rate pass-through exists for Sierra Leone, using annual time series data between 1992 and 2022. The empirical analysis was based on a VECM model. The coefficient of the exchange rate (.5365) which is also significant at the 5% level of significance (p-value = 0.002), indicates that the exchange rate pass-through is incomplete in Sierra Leone. This means that a 1-unit depreciation of the Leone (increase in nominal exchange rate), leads to an increase in Sierra Leone consumer price by .5365 units or approximately 53.65%. This is an indication of indirect pass-through, where importers increase the price of imported goods to maintain their markup in the event of a nominal exchange rate depreciation. The recommendation to the finding is that since it was revealed that Sierra Leone has relatively high exchange rate shocks means that monetary authorities in Sierra Leone should pay more attention to the effects of EXR fluctuation on consumer prices. Measures such as the promotion of local production to substitute imported goods are key to addressing the effects of exchange rate variations.</p><p> </p><p><strong>JEL: </strong>F31, E31, C32, O24<strong></strong></p><p> </p><p><strong> Article visualizations:</strong></p><p><img src="/-counters-/lit/0758/a.php" alt="Hit counter" /></p>