Asymmetric Pass-Through of Exchange Rate Changes to CPI Inflation in Ghana

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Author	Evans Darnor Maka
ISSN	2307-2466
On Pages	338-350
Volume No.	2
Issue No.	5
Issue Date	August 01, 2020
Publishing Date	August 01, 2020
Keywords	CPI inflation, ERPT, Asymmetric, SVAR, Expectation, Ghana

Abstract

This paper examined asymmetric response of CPI inflation to changes in the nominal exchange rate of Ghana. The Structural Vector Autoregressive Regression (SVAR) model was deployed with a careful selection of variables consistent with the New Keynesian macroeconomic theory. Examining both symmetric and asymmetric ERPT, this paper found strong evidence of a response in CPI inflation to changes in exchange rate. The response is not immediate but it featured prominently three months into the future and dissipates thereafter. Pass-through to non-food prices is complete but incomplete in the case of food prices. ERPT is found to be asymmetric with depreciation having a positive effect on CPI inflation as expected within the first three months. Appreciation on the other hand has little impact on CPI inflation and has no statistical significance. It is evident that, the size of the changes in exchange rate does not affect pass-through. Examining the role of inflation environment in pass-through, this paper found that, in periods of increasing inflation, CPI inflation responds strongly to output gap and exchange rate than in periods of decreasing inflation. The variation in CPI inflation explained by changes in exchange rate is very low due to increasing productivity which absorbs the impact.

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