Globalization and Exchange Rate Pass Through: Evidence from Zambia

Abstract

This study examines the impact of globalisation on the exchange rate pass through in Zambia. We study the influence of Chinese imports, regional and multilateral globalization on exchange rate pass through to consumer prices in Zambia between 2006 and 2017. We employ a combination of the pricing to market model and vector error correction model (VECM) to achieve the objective. The results from the study show that Chinese presence and multilateral globalisation have a positive effect on the exchange rate pass through to consumer prices in both the short and long run.  However, the effect of Chinese presence on the exchange rate pass through is greater than that of multilateral globalisation. This is both in the short and long run. On the other hand, regional globalization has a negative effect on the exchange rate pass through to consumer prices in both the short and long run. This could be because regional globalization may be characterized by cross border trade in local currencies in the region. This might have a diminishing effect on exchange rate pass through to prices in Zambia. This signals to policy makers that there could be need to pursue regional integration policies.