Exchange rate movement and import price of Machineries in Nigeria: A bound testing approach

Abstract

This paper examines the driving factors of import price of machineries and their pass-through in dynamics route. An assessment of the short-run and long-run between price of machineries and its driving indicators between 1981 and 2014 is carried out with a view to determining its pass-through, given the need to save domestic price against future exigencies. It makes use of unrestricted error  correction mechanism and the bound testing approach to co integration in an autoregressive distributed lag framework proposed by Pesaran et al. (2001). The empirical estimates reveal that one lag variability of import price, exchange rate, foreign cost, domestic competitors price and demand pressure proxied by GDP  impact it in the long-run. However, the ECM coefficient is properly signed with  -0.549. By implication, approximately 54% of the discrepancy from long run  equilibrium in the previous year is adjusted for by the current year. The findings  suggest that The implication of these results is that government should effectively fight inflationary pressure by implementing appropriate macroeconomic policies that can considerably tame down the level of inflation to non accelerated inflation rate of unemployment, a very sound exchange rate management tends to complement this as there may be case of exchange rate pass-through and this level of inflation is tolerated as it is not inimical to working system of the economy.

Keywords: Import price of machineries, Exchange rate, Inflation and Bounds test