ESTIMATING EXCHANGE RATE PASS-THROUGH TO DOMESTIC PRICES; SIERRA LEONE EXPERIENCE

James L. S. Kallie, Emmanuel Jam Kamara, Alpha Kanu, Joseph M. B. Heimoh

Abstract


The study conducts an investigation that seeks to evaluate the nature of exchange rate pass-through on consumer prices in Sierra Leone. As a small, open economy, the country is susceptible to exogenous shocks. The exchange rate acts as a medium through which external shocks get transmitted to the real economy. Therefore, the general objective of the study is to assess the effect of the fluctuation of the exchange rate on domestic prices in Sierra Leone. More specifically, it sought to determine which type of exchange rate pass-through exists for Sierra Leone, using annual time series data between 1992 and 2022. The empirical analysis was based on a VECM model. The coefficient of the exchange rate (.5365) which is also significant at the 5% level of significance (p-value = 0.002), indicates that the exchange rate pass-through is incomplete in Sierra Leone. This means that a 1-unit depreciation of the Leone (increase in nominal exchange rate), leads to an increase in Sierra Leone consumer price by .5365 units or approximately 53.65%. This is an indication of indirect pass-through, where importers increase the price of imported goods to maintain their markup in the event of a nominal exchange rate depreciation. The recommendation to the finding is that since it was revealed that Sierra Leone has relatively high exchange rate shocks means that monetary authorities in Sierra Leone should pay more attention to the effects of EXR fluctuation on consumer prices. Measures such as the promotion of local production to substitute imported goods are key to addressing the effects of exchange rate variations.

 

JEL: F31, E31, C32, O24

 

Article visualizations:

Hit counter


Keywords


exchange rate pass-through, domestic prices, Granger causality test, Johansen cointegration test, Sierra Leone

Full Text:

PDF

References


Aliyu, S.U.R., Yakub, M.A.U., Sanni, G.K., & Duke, O. (2009). Exchange Rate Pass-Through in Nigeria: Evidence from a Vector Error Correction Model (No. 25053). MPRA Working Paper No. 25053.

Aron, J., Farrell, G., Muellbauer, J.,& Sinclair, L. (2012). Exchange Rate Pass-through to Import Prices, and Monetary Policy in South Africa. South Africa Reserve Bank Working Paper No. WP/12/08.

Asteriou, D., & Hall, S. G. (2007). Applied Econometrics: A Modern Approach using EViews and Microfit (revised edition). New York: Palgrave Macmillan.

Bergin, P.R., & Feenstra, R.C. (2009). Pass‐Through of Exchange Rates and Competition between Floaters and Fixers. Journal of Money, Credit and Banking, 41(1), 35–70.

Berner, E. (2010). Exchange rate pass-through: new evidence from German Micro Data. Economics. Working Paper, No. 2011-01, Kiel University

Beirne, J., & Bijsterbosch, M. (2009). Exchange Rate Pass-through in Central and Eastern European Member States. ECB Working Paper No. 1120 / December 2009.

Bongani, M. (2014). Dissecting the South African Equity Markets into Sectors and States. Saarbrücken: LAP Lambert Academic Publishing

Bussière M. (2007). Exchange rate pass-through to trade prices: the role of non-linearities and asymmetries. Working Paper Series No 822 / October 2007, European Central Bank.

Campa, J.M., & Goldberg, L.S. (2001). Exchange Rate Pass-Through into Import Prices: A Macro or Micro Phenomenon? Review of Economics and Statistics, 54(2), 346–368.

Campa, J.M., & Goldberg, L.S. (2005). Exchange rate pass-through into import prices. Review of Economics and Statistics, 87(4), 679–690.

Campa, J.M., Goldberg, L.S., & González-Mínguez, J.M. (2005). Exchange-rate pass-through to import prices in the Euro area. National Bureau of Economic Research Working Paper No. W11632, Massachusetts.

Central Bank of Eswatini (2019). December Quarterly Review.

Cheikh, N.B., & Louhichi, W. (2014). Measuring the Impact of Exchange Rate Movements on Domestic Prices: A Cointegrated VAR Analysis. FIW Working Paper No.131, Berlin.

Chiparawasha, F. (2015). Exchange rate pass-through to domestic prices in South Africa. Masters Dissertation. Cape Town, University of the Western Cape

Choudhri, K., & Hakura, P. (2001). An Empirical Investigation of Exchange Rate Pass-Through in South Africa. International Monetary Fund working paper No WP/02/165. Washington DC.

Dilla, S., Achsani, N.A., & Anggraeni, L. (2017). Do Inflation Targeting Really Reduced Exchange Rate Pass-through? International Journal of Economics and Financial Issues, 7(3), 444–452.

Dornbusch, R. (1987). Exchange Rates and Prices. American Economic Association, 77(1), 93–106.

Dwyer, J., Kent, C., & Pease, A. (1994). Exchange rate pass‐through: Testing the small country assumption for Australia. Economic Record, 70, (211), 408–423.

Eckstein, Z., & Soffer, Y. (2008). Exchange rate pass-through implications for monetary policy: the Israeli case. BIS Paper No 35.

Enders, W. (2003). Applied Econometric Time Series. New Jersey: Wiley.

Engle, R., & Granger, C. (1987). Cointegration and error correction: Representation, estimation and testing. Econometrica, 55(2), 251–276.

McCarthy, J.F., 2006. The fourth circle: A political ecology of Sumatra’s rainforest frontier. Stanford University Press.




DOI: http://dx.doi.org/10.46827/ejefr.v8i1.1645

Refbacks

  • There are currently no refbacks.


Copyright (c) 2024 James L. S. Kallie, Emmanuel Jam Kamara, Alpha Kanu, Joseph M. B. Heimoh

Creative Commons License
This work is licensed under a Creative Commons Attribution 4.0 International License.

The research works published in this journal are free to be accessed. They can be shared (copied and redistributed in any medium or format) and\or adapted (remixed, transformed, and built upon the material for any purpose, commercially and\or not commercially) under the following terms: attribution (appropriate credit must be given indicating original authors, research work name and publication name mentioning if changes were made) and without adding additional restrictions (without restricting others from doing anything the actual license permits). Authors retain the full copyright of their published research works and cannot revoke these freedoms as long as the license terms are followed.

Copyright © 2016 - 2023. European Journal of Economic and Financial Research (ISSN 2501-9430) is a registered trademark of Open Access Publishing Group. All rights reserved.

This journal is a serial publication uniquely identified by an International Standard Serial Number (ISSN) serial number certificate issued by Romanian National Library. All the research works are uniquely identified by a CrossRef DOI digital object identifier supplied by indexing and repository platforms. All the research works published on this journal are meeting the Open Access Publishing requirements and standards formulated by Budapest Open Access Initiative (2002), the Bethesda Statement on Open Access Publishing (2003) and  Berlin Declaration on Open Access to Knowledge in the Sciences and Humanities (2003) and can be freely accessed, shared, modified, distributed and used in educational, commercial and non-commercial purposes under a Creative Commons Attribution 4.0 International License. Copyrights of the published research works are retained by authors.