Nigeria’s Shift to a Floating Regime: Interest Rate and Exchange Rate Pass-Through and Policy Effectiveness

Selected Issues Papers, June 17, 2026

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Canonical URL: Nigeria’s Shift to a Floating Regime: Interest Rate and Exchange Rate Pass-Through and Policy Effectiveness

In June 2023, Nigeria transitioned from a multi-window, managed exchange rate system to a floating regime.
This paper examines how the regime change altered interest rate and exchange rate pass-through (ERPT) using econometrics cointegration methods and a Bayesian VAR estimated over 2007–2025.
Key subjects: Central bank policy rate, Exchange rate arrangements, Exchange rate pass-through, Exchange rates, Financial services, Foreign exchange.

Econometrics cointegration methods.
Bayesian VAR estimated over 2007–2025.
Keywords guiding analysis: Bayesian VAR, capital flows, Central bank policy rate, Exchange rate arrangements, Exchange rate pass-through, exchange rate regime, Exchange rates, fiscal dominance, inflation, monetary policy, monetary transmission, Nigeria, oil shocks.

ERPT is highly shock-dependent.
Under the pre-unification regime:
- Pass-through was muted or negative.
- This reflected policy insulation through reserve management and capital controls.
Following unification:
- ERPT becomes positive and economically meaningful, particularly for external financial shocks such as US monetary tightening, indicating that the exchange rate channel has been reactivated.
- Interest rate transmission has also strengthened post-unification, although key market rates are not yet firmly anchored to the MPR.
Overall assessment:
- The unification marks a shift from a framework in which exchange rate rigidity suppressed the domestic price impact of external shocks that transmit through the exchange rate — at the cost of mounting misalignment and parallel market distortions — to one in which such shocks transmit more transparently to domestic prices through a market-determined rate.

The effectiveness of the new framework depends critically on:
- Shock-specific ERPT dynamics.
- The completeness of interest rate transmission.
- The timeliness and credibility of CBN policy responses.