Revisiting the Exchange Rate Pass-Through to Inflation in Africa's Two Largest Economies: Nigeria and South Africa

Abstract

This paper revisits the exchange rate pass-through (ERPT) to inflation in Nigeria and South Africa by incorporating structural breaks and using time series variables, namely the consumer price index, nominal effective exchange rate, gross domestic product, and crude oil price. Based on the Maki cointegration test and a flexible estimation approach of the Autoregressive Distributed Lag (ARDL) model, our empirical evidence suggests that the long- and short-run ERPT to inflation is complete for Nigeria, while for South Africa it is incomplete both in the long run and short run. This result indicates that prices are stickier in South Africa compared to Nigeria. The comparison between Nigeria and South Africa confirms the role of inflation targeting and central bank credibility on the ERPT. The results divulge further that output growth in Nigeria increases inflation in the long run while it is anti-inflationary in the short run. For South Africa, the effect of output growth is negatively insignificant. In addition, the long-run effect of oil price is negative and significant for Nigeria, while for South Africa the short-run effect of oil price is positive and significant. Therefore, the findings of this paper will assist the monetary authorities to achieve monetary policy objectives.