Letters in Economic Research Updates
Exchange Rate Changes and Price Differential at the Nigerian Border Markets
Abstract
Olusola Oloba
The study investigates the extent to which frequent fluctuations in exchange rates contribute to the price differentials observed in the Nigeria-Benin border markets. This inquiry is warranted due to the fact that different prices are being charged on the same staples of same quality across the Nigeria-Benin borders as evident from the literature. The Nige- ria-Benin border lays claims to several efficient border markets involving two distinct nationalities with different curren- cies. The prevailing payment system in these markets still requires conversion from one currency to the other; however, the conversion of these currencies is fraught with challenges and is not readily accessible through conventional chan- nels, potentially resulting in varied valuations for commodities traded on opposing sides of the border markets. Findings from the price cointegration analysis indicate the existence of a price adjustment mechanism that enables the two prices to converge towards their long-term equilibrium relationship, thereby implying the presence of linear and symmetric price transmission across the borders and consequently negating the likelihood of asymmetric price transmission. The research, employing the Autoregressive Distributed Lag (ARDL) model, concludes that a significant inverse relationship exists between the appreciation of the real effective exchange rate and the border value of a product, both in the short run and long run, thereby suggesting that as the currency strengthens, the prices of goods at the border decrease. This investigation advocates for enhanced efforts to be directed towards the implementation of an effective appreciation policy, as this would likely normalise the price of similar products at the in cross-border market.