Asymmetric Exchange Rate Pass Through to Consumer Prices: Evidence from Zambia

Published date01 November 2023
AuthorHumphrey Fandamu,Manenga Ndulo,Dale Mudenda,Mercy Fandamu
Date01 November 2023
Subject MatterArticles
Asymmetric Exchange
Rate Pass Through
to Consumer Prices:
Evidence from
Humphrey Fandamu1, Manenga Ndulo2,
Dale Mudenda2 and Mercy Fandamu1
The purpose of this study was to examine the asymmetric exchange rate pass
through (ERPT) to consumer price inflation in Zambia. We examined ERPT to
consumer price inflation arising from kwacha depreciation and appreciation for
the period between the first quarter of 1985 to the fourth quarter of 2017. We
employed the structural vector autoregressive model. The results showed that
ERPT to consumer price inflation is incomplete and asymmetric. Consumer
prices in Zambia are more responsive to kwacha depreciation than to apprecia-
tion. The depreciation of the kwacha has a greater significant impact on consumer
prices than the appreciation of the kwacha. The impulse response function analy-
sis showed that the shock to kwacha depreciation is very persistent than that of
kwacha appreciation. Finally, the forecast error variance decomposition showed
that a depreciation shock explains a bigger portion of the variance in consumer
price inflation than an appreciation shock. These findings show that kwacha depre-
ciation and appreciation have different effects on consumer price inflation, thereby
confirming the presence of asymmetries in the ERPT. The study also accounted
for the effect of commodity price booms in influencing ERPT. However, results of
ERPT did not change much with the inclusion of commodity price booms.
JEL Codes: E31, F31
Inflation, ERPT, appreciation, depreciation, asymmetries
Foreign Trade Review
58(4) 504–523, 2023
© 2023 Indian Institute of
Foreign Trade
Article reuse guidelines:
DOI: 10.1177/00157325221143886
1 Directorate of Research, Copperbelt University, Kitwe Zambia, Kitwe, Zambia
2 Department of Economics, University of Zambia, Lusaka, Zambia
Corresponding author:
Humphrey Fandamu, Department of Economics, Copperbelt University, Kitwe, Zambia, P. O. BOX
21692, Kitwe, Zambia.
Fandamu et al. 505
Earlier studies of the exchange rate pass through (ERPT) assumed that ERPT to
consumer prices is symmetric. This implies that both exchange rate appreciation
and depreciation have the same effect on consumer prices. This might not be realis-
tic because currency depreciation and appreciation have been shown to have
different impacts on consumer prices (Hoa & Hafradb, 2020; Kassi et al., 2019).
Furthermore, recent studies have shown that ERPT to consumer prices is asymmet-
ric. This means that currency appreciation and depreciation have different impacts
on consumer prices (Kassi et al., 2019; Pollard & Coughlin, 2004). Kassi et al.
(2019) contend that the symmetry assumption might be an imprecise characterisa-
tion of ERPT to consumer prices. This necessitates the need to examine ERPT to
consumer prices due to both exchange rate appreciation and depreciation.
It is interesting to situate the study on the asymmetric ERPT to consumer prices
in Zambia. This is because in the past decades the Zambian economy has wit-
nessed rapid and extended periods of depreciation of the Zambian kwacha with
shorter episodes of appreciation. For instance, Cheelo and Banda (2015) report
that between 2008 and 2015, the Zambian kwacha depreciated by 108% cumula-
tively against the US dollar. In 2015 alone, the kwacha fell by 51% against the US
dollar and 31.1% against the South African rand. During the same period, Zambia
recorded increased rates of inflation. For instance, inflation increased from 7.9%
in June 2014 to 14.5% in October 2015 and peaked at 22% in February 2016
(Chipili, 2021). The Zambian kwacha has continued to depreciate against major
currencies (Zgambo, 2015). It is interesting to empirically assess how consumer
prices respond to both kwacha appreciation and depreciation. However, this has
not been done. Most of the ERPT studies done on Zambia have assumed that
ERPT is symmetric in nature (Fandamu et al., 2021; Roger et al., 2019; Zgambo,
2015). Our study makes a contribution to the literature on the ERPT on Zambia
by assuming that ERPT to consumer prices is asymmetric. To this end, our study
decomposes the changes in the exchange rate into kwacha depreciation and appre-
ciation to model the ERPT to consumer prices.
This study is very important in that it estimates the ERPT to consumer prices
due to both kwacha depreciation and appreciation. This will contribute to the
understanding of how consumer prices respond to exchange rate flexibility since
exchange rates in Zambia are flexible. This information is vital because the nature
and the degree of the ERPT will have implications for inflation targeting. Thus,
the estimates of the ERPT in this study will enable the economic agents in Zambia
such as the Bank of Zambia, policy makers, firms and consumers to closely
monitor inflation pressures arising from exchange rate fluctuations. This will ulti-
mately help design appropriate responses to exchange rate movements in Zambia.
The rest of the article proceeds as follows: We review the related theoretical and
empirical literature and develop a theoretical framework and model for analysis.
We look at the data and their sources. We then empirically estimate the ERPT
and analyse the impulse response functions. We look at the relative importance of
kwacha depreciation and appreciation shocks on consumer price inflation. We end
the article with a conclusion and policy implications.

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