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

Laurent Kemoe, Moustapha Mbohou, Hamza Mighri and Saad Quayyum

No 2024/059, IMF Working Papers from International Monetary Fund

Abstract: 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.

Keywords: Exchange rage passthrough; inflation; nonlinearities; Sub-Saharan Africa; exchange rate passthrough; Passthrough estimation result; exchange rate movement; A. exchange rate regime; inflation in Sub-Saharan Africa; Exchange rates; Exchange rate arrangements; Nominal effective exchange rate; Exchange rate pass-through; Global (search for similar items in EconPapers)
Pages: 36
Date: 2024-03-15
New Economics Papers: this item is included in nep-afr, nep-cba, nep-ifn, nep-mon and nep-opm
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