Nigeria’s Shift to a Floating Regime: Interest Rate and Exchange Rate Pass-Through and Policy

In June 2023, Nigeria transitioned from a multi-window, managed exchange rate system to a floating regime. This paper examines how the regime change altered the interest rate and exchange rate pass-through (ERPT) using econometrics cointegration methods and a Bayesian VAR estimated over 2007–2025. We show that ERPT is highly shock-dependent. under the pre-unification regime, pass-through was muted or negative, reflecting policy insulation through reserve management and capital controls. Following unification, ERPT becomes positive and economically meaningful - particularly for external financial shocks such as US monetary tightening - indicating that the exchange rate channel has been reactivated. Interest rate transmission has also strengthened post-unification, although key market rates are not yet firmly anchored to the MPR. Overall, the unification marks a shift from a framework in which exchange rate rigidity suppressed the domestic price impact of external shocks that transmit through the exchange rate — at the cost of mounting misalignment and parallel market distortions — to one in which such shocks transmit more transparently to domestic prices through a market-determined rate. The effectiveness of the new framework depends critically not only on shock-specific ERPT dynamics and the completeness of interest rate transmission, but also on the timeliness and credibility of CBN policy responses.