Effect of Exchange Rate Movements on Inflation in Sub-Saharan Africa

By Laurent Kemoe, Moustapha Mbohou, Hamza Mighri, Saad N Quayyum

March 15, 2024

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Laurent Kemoe, Moustapha Mbohou, Hamza Mighri, and Saad N Quayyum. Effect of Exchange Rate Movements on Inflation in Sub-Saharan Africa, (USA: International Monetary Fund, 2024) accessed November 12, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

This paper provides new evidence on the exchange rate passthrough to domestic inflation in Sub-Saharan Africa (SSA) using both bilateral US dollar exchange rate and the nominal effective exchange rate (NEER), and monthly data. We find that depreciations cause sizable increases in domestic inflation. The passthrough in SSA is higher than in other regions and its magnitude depends on the exchange rate regime, type of exchange rate (bilateral versus NEER), natural resource endowment and domestic market competitiveness. The passthrough is found to be disproportionately larger and more persistent for large depreciation shocks, and for exchange rate changes that are more persistent. We also find evidence of asymmetry, with passthrough eight times stronger during depreciations than appreciations. Additional findings suggest that improved monetary policy effectiveness is an important driver of our observed declining estimates of exchange rate passthrough over time, supporting the long-standing view that strengthening monetary policy frameworks and credibility helps mitigate the impact of depreciations on inflation.

Subject: Exchange rate arrangements, Exchange rate pass-through, Exchange rates, Foreign exchange, Inflation, Nominal effective exchange rate, Prices

Keywords: A. exchange rate regime, Exchange rage passthrough, Exchange rate arrangements, Exchange rate movement, Exchange rate passthrough, Exchange rate pass-through, Exchange rates, Global, Inflation, Inflation in Sub-Saharan Africa, Nominal effective exchange rate, Nonlinearities, Passthrough estimation result, Sub-Saharan Africa

Publication Details

Pages:

36
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2024/059
Stock No:

WPIEA2024059
ISBN:

9798400269264
ISSN:

1018-5941

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