## 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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## Bibliographic details
- Authors: Cecilia Melo Fernandes, Chris Stumphius
- Published: June 17, 2026
- Series: Selected Issues Papers
- DOI: https://doi.org/10.5089/9798229051170.018

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### Regime change and research scope
- 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.

### Methods and analytical approach
- 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.

### Main findings on ERPT and interest rate transmission
- 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.

### Policy implications and effectiveness conditions
- 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.

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_Source: https://www.imf.org/en/publications/selected-issues-papers/issues/2026/06/17/nigerias-shift-to-a-floating-regime-interest-rate-and-exchange-rate-pass-through-and-policy-577017_