Testing the non-linearities of exchange rate pass-through in Somalia: does dollarization affect consumer prices?

Abdikafi Hassan Abdi · Abdimalik Ali Warsame · Ibrahim Abdukadir Sheik-Ali

10 citations0/0 files storedCogent Economics & Finance

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Monetary Policy and Economic Impact Economics of Agriculture and Food Markets Market Dynamics and Volatility

Abstract

Over the past three decades, Somalia's economic landscape has witnessed a noticeable dependence on imported goods.The exchange rate was unregulated owing to the collapse of the country's central bank.This unregulated environment has introduced significant volatility in exchange rates, profoundly impacting consumer prices and fostering a prevalent shift towards the utilization of the US dollar in economic transactions.Hence, this undertaking delves into the asymmetric effects of exchange rates on consumer prices in the presence of dollarization in Somalia from 1995 to 2019.Employing both linear and nonlinear autoregressive distributed lag (NARDL) cointegration methodologies, we explore the short-run and long-run dynamics between exchange rates and consumer price levels.The long-run empirical results from the NARDL demonstrate asymmetrical cointegration between the unregulated exchange rate and inflation in Somalia.Both appreciation and depreciation of exchange rates exert differing impacts on consumer prices, with depreciation exhibiting a more pronounced effect.In addition, the evidence suggests that the exchange rate pass-through is incomplete in Somalia regarding its inelastic coefficient.Oil prices exhibit a substantial and statistically significant association with inflation, both in the long-run and short-run, while GDP remains inconsequential.In the short-run, the most remarkable outcome indicates that dollarization significantly contributes to mitigating inflationary pressures.Based on our empirical insights, the central bank should enhance regulatory oversight of the foreign exchange market by strictly controlling and prohibiting the issuance of counterfeit banknotes to achieve price stability.

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References

2001Bounds testing approaches to the analysis of level relationships 2014Modelling Asymmetric Cointegration and Dynamic Multipliers in a Nonlinear ARDL Framework 2005The saving and investment nexus for China: evidence from cointegration tests 2000Low inflation, pass-through, and the pricing power of firms 2009Causes and Consequences of the Oil Shock of 2007-08 2001Exchange Rate Pass-Through to Domestic Prices: Does the Inflationary Environment Matter?2018Oil prices and inflation dynamics: Evidence from advanced and developing economies 2004Exchange Rate Pass-Through and the Inflation Environment in Industrialized Countries: An Empirical Investigation

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