Does the pass‐through of exchange rate and globalization validate the rockets and feathers hypothesis in Nigeria? Evidence from a nonlinear model

Abstract

The rapid shift in trade policy towards greater openness is theoretically presumed to leave domestic prices vulnerable to the change in exchange rate. This study investigates not only the asymmetric pass‐through of exchange rate but also globalization to consumer price inflation (CPI) in Nigeria and determines whether the pass‐through is consistent with the rockets and feathers hypothesis. Using the Nonlinear Autoregressive Distributed Lag (NARDL) model and the monthly data from 1986 M01–2015 M12, the results provide evidence that the pass‐through of exchange rate and globalization is asymmetric with depreciation and negative shocks to globalization exerting a higher pass‐through—a result that validates the rockets and feathers hypothesis. The results further suggest that the asymmetric pass‐through of exchange rate and globalization is elastic in the long run except for the positive shocks to exchange rate while in the short run, it is inelastic except for the negative shocks to globalization. Overall, the pass‐through, in the long run, is higher compared to the pass‐through in the short run.

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