Testing the non-linearities of exchange rate pass-through in Somalia: does dollarization affect consumer prices?

Figures & data

Table 1. Variable descriptions and sources.

Variable	Symbol	Unit of measurement	Source
Inflation	CPI	Consumer price index	FSNAU
Nominal exchange rate	ER	Somali shilling per 1 US dollar	IMF
Real GDP	GDP	Gross domestic product (GDP) (constant 2015 US$)	UNSD
Oil prices	OIL	International Brent crude oil price in US dollar per barrel	FRED
Dollarization	DOL	It is a dummy variable. It takes a value of ‘1’ during the dollarization period, and a value of ‘0’ otherwise.

Table 2. Result of the ADF and PP unit root tests.

	ADF		PP
Variable	Intercept	Intercept with trend	Intercept	Intercept with trend
lnCPI	−2.628	−2.0591	−2.5874	−2.1669
ΔlnCPI	−4.3452***	−4.4109**	−4.3872***	−4.5985***
lnER	−2.1748	−2.4696	−2.204	−1.7556
ΔlnER	−3.2781**	−4.1126**	−3.2678**	−3.2261
lnGDP	−0.4128	−3.0035	−0.5157	−3.2261
ΔlnGDP	−5.3670***	−5.4838***	−5.3670***	−5.4124***
lnOIL	−1.5035	−1.3398	−1.4833	−1.3958
ΔlnOIL	−4.1872***	−4.1769**	−4.1436***	−5.1882***
DOL	−2.0867	−1.755	−2.0837	−1.7439
ΔDOL	−4.7958***	−5.0301***	−4.7959***	−5.1860**

Note. ***, **, and * represent significance level at 1, 5, and 10%. CPI, ER, GDP, OP, Dolla represent consumer price index, exchange rate, gross domestic product, oil price, and dollarization respectively. Δ stands for first difference level, and ln is the natural logarithm.

Table 3. Bounds testing.

Model specification	Lower bound	Upper bound	F-statistics	Conclusion
Linear	3.354	4.774	4.6828	Inconclusive
Nonlinear	3.354	4.774	20.1396	Cointegration

Note. The critical values are from Narayan (2005), and it is based on a 5% significance level.

Table 4. Long-run coefficient elasticities.

Variable	Coefficient
lnER^+	0.5221***
	(−5.7199)
lnER^−	−0.3729**
	(−2.5054)
lnGDP	0.5714
	(−1.2998)
lnOIL	0.2765***
	(−7.232)
DOL	−0.0822
	(−1.4983)

Note. *** denotes significant at 1%. Values in parenthesis represent t-statistic.

Table 5. Short-run coefficients elasticities and ECT.

Variable	Coefficient
Constant	0.034
	(−0.6745)
ΔlnCPIt−1	0.4030***
	(−3.3357)
ΔlnER^+	0.2409*
	(−2.047)
ΔlnLER^−	−0.0788
	(−0.3306)
ΔlnGDP	0.0212
	(−0.0136)
ΔlnOIL	0.3354***
	(−4.8283)
ΔDOL	−0.1802
	(−2.1533)
ECTt−1	−0.9597
	(−5.3925)

Note. ***, ** and * represent statistical significance at 1, 5 and 10%. T-statistics are in the parenthesis (.).

Figure 1. Stability tests.

Figure 2. Dynamic multiplier effect of exchange rate.

Table 6. Diagnostic tests.

R^2	0.99
Serial correlation - LM test	0.8595
	[0.1429]
Heteroscedasticity - BPG test	2.0661
	[0.1701]
Normality - JB test	1.3871
	[0.4997]
Ramsey RESET test	1.8544
	[0.2064]
WLR	3.844
	[0.0032]
WSR	1.0939
	[0.2912]

P-values are in the brackets [.]. W_LR and W_SR are the long-run and short-run asymmetries of ER.

Narayan, P. K. (2005). The saving and investment nexus for China: evidence from cointegration tests. Applied Economics, 37(17), 1979–1990. https://doi.org/10.1080/00036840500278103

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Data availability

The datasets used and/or analyzed during the current study are available on a reasonable request.