The Effect of Exchange Rate Changes on Consumer Prices in Nigeria: Evidence from VECM Model

Abstract

The continuous adoption of trade openness policies and floating exchange rates regime by developing countries exposed them to speculative pressures. It makes exchange rate shocks easily transferred to domestic consumer prices. That makes tremendous impacts on the domestic consumer price inflation. This paper thus examines the response of domestic consumer prices to exchange rate changes otherwise known as ‘Exchange rate pass-through’. The paper uses vector error correction (VECM) model to examine the relationship. A quarterly time series data for a period ranging from 1986Q1 to 2013Q4 for Nigeria was used. The study found a substantial but incomplete and slow pass-through of exchange rate changes to domestic prices.