Dynamic Passthrough of Oil Price and Exchange Rate to Inflation in Nigeria: A Time-Varying Parameter Structural Vector Autoregressive (TVP-SVAR) Approach

This study examines the dynamic passthrough of oil price and exchange rate to inflation using a time-varying structural vector autoregressive (TVP-SVAR) model with data from 1995 M01 to 2021 M07. We accounted for 2008/2009 global financial crisis (GFC), the 2016 economic recession and the 2019/2020 coronavirus pandemic in the model. The results indicate that oil price passthrough to food inflation is dynamic and incomplete, being positive during the GFC but marginally negative during the recession and the pandemic. Exchange rate passthrough to food inflation during the three events are contemporaneously neutral but became positive afterwards. The results show that oil price and exchange rate passthrough to food inflation was strongest during the pandemic and the GFC, respectively. Further evidence revealed that oil price shocks have significant passthrough to food and headline inflation during the GFC while exchange rate passthrough was significant during the pandemic. Oil price shocks appeared to have more dominant passthrough to inflation than exchange rate. The study concludes that policy measures that moderate the passthrough effect of oil price shock to inflation can dampen inflationary pressures more than exchange rate policy.