Exchange Rate Pass-Through to Consumer Prices in Nigeria: A State Space Approach

The pass-through of exchange rate movements to consumer prices in Nigeria has typically been estimated under the assumption that the transmission coefficient is fixed over the sample period. This assumption sits uneasily with a currency history that includes a managed float in 2016, a further devaluation in 2020, and a unification of exchange rate windows in 2023. This study estimates a time-varying exchange rate pass-through (ERPT) coefficient for Nigeria using a state space model with Kalman filtering, drawing on quarterly data spanning 2007Q1 to 2026Q1 for the nominal exchange rate, consumer price inflation, an import price index, and the Brent oil price. Unit root tests indicate a mixed order of integration, and the Johansen procedure confirms a cointegrating relationship among the variables in levels. The measurement equation links inflation to exchange rate changes, import price changes, and oil price changes, while the pass-through coefficient itself follows a random walk in the state equation. The filtered coefficient rises from around 0.17 in the early sample to a peak near 0.65 following the 2023 unification, with visible step increases around each devaluation episode. Import prices contribute more to the transmission than oil prices across most of the sample. The results are consistent with incomplete but rising pass-through and support the case for state-dependent rather than fixed-coefficient monetary policy analysis in Nigeria.