Relative price effects of exchange rate depreciation in Nigeria under fixed and fixed/flexible mark-up pricing regimes

Abstract

The efficacy of exchange rate depreciation in altering the structure of relative prices varies with respect to the prevailing pricing regime, especially, in an economy such as Nigeria's where production in all sectors depends directly or indirectly on imported intermediate inputs. Since the relative price effects of exchange rate depreciation in such circumstances cannot be determined, a priori, an input-output price model useful for simulating the impacts of exchange rate depreciation on sectoral prices under alternative mark-up pricing regimes is developed and simulated under fixed mark-up pricing and mixed (fixed/flexible) mark-up pricing regimes. The results show that exchange rate depreciation is likely to alter relative prices more under a mixed (fixed/flexible) mark-up pricing regime where the mark-ups in petroleum, utilities, transport and communications sectors are fixed while mark-ups in the other sectors are altered on the basis of the expected exchange rate in the next period.