Inflation-balance of trade nexus in Nigeria: The impact of exchange rate pass-through

The relationship between exchange rate (EXR) and foreign trade (FT) in Nigeria has been a contentious issue since Nigeria’s independence in 1960. This study investigated the link between exchange rate and foreign trade through the prism of exchange rate pass-through (EXRPT) to domestic prices, utilizing monthly data from 2011 to 2022. The study was built on two models—the base and main models respectively. Employing the VAR technique and its Vector Error Correction Model (VECM) extension, the paper found that EXRPT to consumer prices is incomplete in the short run but its effect was found to be higher on imports than on consumer prices. It follows that the impact of EXRPT diminishes along the price chain. Results from the main model indicate that the impact of domestic prices on balance of trade was found to be negative with elasticity of −0.437541and is also statistically significant, thus, confirming the Marshal-Lenner condition. The Marshal-Lenner condition and findings of this study provide evidence that depreciating exchange rate is not recommended for an import inelastic country like Nigeria.