THE DYNAMICS OF EXCHANGE RATE PASS-THROUGH TO DOMESTIC PRICES IN TURKEY

Abstract

In an environment where countries have trade relations with each other, prices of domestic goods should vary due to trade. Developing countries in particular import raw materials and semi-manufactured goods from other countries in order to carry out the production process. Final goods are imported for household consumption as well. Exchange rate changes naturally affect domestic prices as well. The effect of exchange rate pass-through on inflation for Turkey was investigated with the NARDL method using the data between January 2003 and November 2015. According to the results of the analysis, an increase in the exchange rate increases the consumer price index. While a decrease in the exchange rate does not have the same reaction, any decrease in the exchange rate would cause prices to increase in the short-run. In addition, domestic product has an asymmetrical and negative relationship with price index in short and long-term according to our analysis. We found that in the short-run both the exchange rate and domestic product are asymmetrically related with the price index where only domestic product asymmetrically affects the consumer price index.

Keywords

• Exchange rate pass-through,NARDL,domestic prices

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