Tseday Jemaneh Mekasha, University of Copenhagen: "Exchange Rate Pass-Through and Prices: Evidence from Sub-Saharan Africa with a Focus on Ethiopia" – University of Copenhagen

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Tseday Jemaneh Mekasha, University of Copenhagen: "Exchange Rate Pass-Through and Prices: Evidence from Sub-Saharan Africa with a Focus on Ethiopia"

Abstract:

The degree, speed and duration in which domestic price level responds to changes in exchange rate are crucial factors in understanding inflation dynamics and determining the effectiveness of monetary policy. In this paper we empirically examine the impact of an exchange rate shock on consumer price in Sub Saharan African with a particular focus on Ethiopia. Moreover, for each consecutive period after the exchange rate shock, attempt is made to disentangle the variation in prices that is attributed to the exchange rate shock from movements in other macroeconomic variables. A Structural Vector Autoregressive (SVAR) model is employed using long run identifying restrictions that are derived from a small open economy macro model that incorporates shocks to external flows and commodity prices. The results for Ethiopia point to a small, incomplete and short lived exchange rate pass-through to consumer prices. According to the variance decomposition results shocks from supply, nominal exchange rate and price itself account for the major share of variation in consumer price in Ethiopia. A comparative case analysis for Kenya also suggests an incomplete pass through which is smaller compared to the case of Ethiopia. Besides, shocks from external flows, nominal exchange rate and price itself are found to be important factors in determining consumer price variation in Kenya.