Exchange rate pass-through to domestic prices in Namibia: SVAR evidence

Johannes Sheefeni,Matthew Ocran

doi:10.4102/jef.v7i1.132

Johannes Sheefeni, Matthew Ocran

Open Access

https://doi.org/10.4102/jef.v7i1.132

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Abstract

This article investigates exchange rate pass-through to domestic prices in Namibia. The study covers the period of 1993:Q1 – 2011:Q4, and employed the impulse response functions and variance decompositions obtained from a structural vector autoregressive model. The results from the impulse response functions show that there is a high and long-lasting effect from changes in exchange rates to inflation in Namibia, or high exchange rate pass-through into domestic inflation. The results from the forecast error variance decompositions also reflect that changes in the price level evolve endogenously with changes in the exchange rate. The results are in agreement with the findings of the impulse response functions regarding the significant effect of the exchange rate variable on domestic prices (inflation). The results confirm an incomplete pass-through, indicating that the purchasing power parity theory does not hold, with regard to the price level, in the context of Namibia.

Highlights

In a small open economy such as Namibia’s, the exchange rate channel provides an important transmission avenue for monetary policy
The series were found to be non-stationary in level form; the hypothesis of the presence of unit root can be accepted, and it can be concluded that all variables are non-stationary in level form with the exception of lnCPSA according to the Augmented Dickey-Fuller (ADF)
Since the other two statistical tests are contrary to the ADF, the majority rule was followed; one can conclude that all the test statistics concluded that all the four variables are non-stationary

Summary

Introduction

In a small open economy such as Namibia’s, the exchange rate channel provides an important transmission avenue for monetary policy. It is for this reason that understanding the extent to which exchange rate alters relative prices is critical. The literature on exchange rate pass-through refers to the effect of exchange rate changes on one of the following: (1) import and export prices, (2) consumer prices, (3) investments and (4) trade volumes (Wimalasuriya, 2005; Eckstein and Soffer, 2008). Exchange rate pass-through is critical to monetary policy design and exchange rate policies. It is important because it serves as an indicator to economic agents in particular for the private sector

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