Against the backdrop of debilitating domestic and exogenous shocks to the Nigerian economy in recent years, the foreign exchange market has experienced notable challenges which have elicited the attention of different stakeholders..
Sebastian Edwards, Luis Cabezas 08 April 2021
The nominal exchange rate plays a dual role in macroeconomic adjustments – it is part of the transmission mechanism of monetary policy, and it also helps accommodate external and domestic shocks through its effect on the real exchange rate. This column uses disaggregated price index data from Iceland to test how exchange rate pass-through varies with the international tradability of goods and with the monetary policy framework. It shows that pass-through is significantly higher for tradables relative to nontradables. In addition, it finds that improvements in the credibility of the central bank are associated with declines in the exchange rate pass-through.