Working Paper 879
The study of import tariffs pass-through has been observed to be crucial for policy making, for instance, this may inflate some goods’ prices thus harming individual welfare. However, the extant literature on the import tariffs pass-through effect has largely ignored the possibility of spatial dependence between domestic goods prices which may brew imprecise estimates. Hence, this study proposes an extension of the traditional empirical model for estimating the import tariff pass-through effect by introducing controls for the domestic spatial dependence of prices. The estimates rely on a panel dataset of consumer goods for Zimbabwe, which has both the individual and time spatial effects. The spatial econometrics model used in this study all agree that there is positive spatial dependence of domestic goods’ prices in Zimbabwe over the period 2009 to 2014. When compared to our modified model, the traditional import tariffs pass-through model was found to highly overestimate the import tariffs pass-through effect. The study found that a positive and significant portion of import tariffs is being passed on to domestic goods prices in Zimbabwe. Thus, there is a need for policy to be cautious of the import tariffs increase in relationship to national inflation, and poverty targets.
Key words: spatial dependence, import tariffs pass-through, Consumer Goods Prices
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