Effect of Exchange Rate Movements on Inflation in Sub-Saharan Africa
IMF Working Papers, March 15, 2024
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- Effect of Exchange Rate Movements on Inflation in Sub-Saharan Africa
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Bibliographic details
- Authors: Laurent Kemoe, Moustapha Mbohou, Hamza Mighri, Saad N Quayyum
- Published: March 15, 2024
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798400269264.001
Key findings
- Depreciations cause sizable increases in domestic inflation in Sub-Saharan Africa (SSA).
- The exchange rate passthrough in SSA is higher than in other regions.
- The magnitude of passthrough depends on:
- the exchange rate regime,
- type of exchange rate (bilateral US dollar exchange rate versus the nominal effective exchange rate (NEER)),
- natural resource endowment,
- domestic market competitiveness.
- Passthrough is disproportionately larger and more persistent for large depreciation shocks.
- Passthrough is disproportionately larger and more persistent for exchange rate changes that are more persistent.
- Evidence of asymmetry: passthrough is eight times stronger during depreciations than appreciations.
- Improved monetary policy effectiveness is an important driver of declining estimates of exchange rate passthrough over time, supporting the view that strengthening monetary policy frameworks and credibility helps mitigate the impact of depreciations on inflation.
Data and methodology notes
- Uses both bilateral US dollar exchange rate and the nominal effective exchange rate (NEER).
- Employs monthly data.
- Subject tags in the paper include: Exchange rate arrangements, Exchange rate pass-through, Exchange rates, Foreign exchange, Inflation, Nominal effective exchange rate, Prices.
- Keywords listed: A. exchange rate regime, Exchange rage passthrough, Exchange rate arrangements, exchange rate movement, Exchange rate pass-through, exchange rate passthrough, Exchange rates, Global, inflation, inflation in Sub-Saharan Africa, Nominal effective exchange rate, nonlinearities, Passthrough estimation result, Sub-Saharan Africa.
Policy implications and interpretation
- Strengthening monetary policy frameworks and credibility can mitigate the inflationary impact of depreciations.
- Greater monetary policy effectiveness is associated with declining exchange rate passthrough estimates over time.
- Policy design should account for:
- higher passthrough in SSA relative to other regions,
- larger and more persistent effects from large or persistent depreciation shocks,
- asymmetry in responses to depreciations versus appreciations,
- heterogeneity by exchange rate regime, exchange rate measure (bilateral vs NEER), resource endowment, and market competitiveness.
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- Working Paper