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

Year 2016, Volume: 5 Issue: 1, 39 - 48, 30.03.2016

Huseyin Karamelikli Suna Korkmaz

https://doi.org/10.17261/Pressacademia.2016116552

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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