Asymmetry in Exchange Rate Pass-Through to Consumer Prices: New Perspective from Sub-Saharan African Countries

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.

Investigating the Finance-Energy-Growth Trilogy in Sub-Saharan Africa: Evidence From the NARDL Framework

“…Table A1 reports the corresponding critical values for F PSS in Appendices. Like other studies (Kassi, Rathnayake, et al, 2019; Kassi, Sun, et al, 2019), we used the general-to-specific approach (unidirectional method and p -value backward 10% significance level as stopping criteria) with a maximum lag length of 10. The results are the Authors’ computations in Eviews 9.” L T A = long-term asymmetry; S T A = short-term asymmetry; S T S and L T S denote the Short-term and Long-term Symmetrical models, respectively; F PSS and t BDM denote the Pesaran et al (2001) F -test and Banerjee et al (1998) t -test, respectively. * p < .1.…”

“…Second, we converted the annual data to quarterly data to improve the correctness of the results. We used a variation of the low-to-high-frequency method (the quadratic-match option) consistent with previous research (Kassi, Rathnayake, et al, 2019; Kassi, Sun, et al, 2019; Shahbaz et al, 2017). ” This method applies an interpolation that approximates the local quadratic polynomial such that the mean value of the next four quarters equals the data of the matching year.…”

Inflationary effects of oil price and exchange rate shocks in South Africa: Evidence from time‐varying pass‐through coefficients

“…The results suggest the presence of incomplete ERPT in both regimes, excluding the unstable regimes of South Korea and the Philippines. Kassi et al (2019) have adopted the model of Baharumshah et al (2017) for 40 sub-Saharan African countries. In all countries, the behaviour of ERPT to consumer prices is nonlinear and asymmetric, indicating that pass-through is greater in economies with fixed exchange rate regimes.…”

Asymmetric impact of exchange rate pass-through into employees' wages in sub-Saharan Africa: panel non-linear threshold estimation

“…They found significant effects of asymmetric volatility on some of the countries. Kassi et al (2019) argued that asymmetry ERPT on consumer prices in 40 SSA countries was mostly a short-term phenomenon, and no attempt was made to justify a threshold level to avoid arbitrarily subjective submissions of their findings. Similar study was conducted by Frimpong and Adam (2010) and Maka (2013) in Ghana, Bada et al (2016) in Nigeria and Yiheyis and Cleeve (2016) in Malawi.…”