THE RELATIONSHIP BETWEEN INFLATION AND EXCHANGE RATE: FOR EUROPEAN UNION COUNTRIES PANEL COINTEGRATION AND CAUSALITY ANALYSIS
Öz
Continuous increase in the general prices level is causing instability in the
market economy so this affects all segments of society. One of the most
important ways to ensure economic stability is provite the low inflation.
Increase in the exchange rate causes an increase in domestic prices by
increasing the cost of imports. Therefore, it is expected to increase inflation to
rise in the exchange rate. In this study, 25 for the European Union countries
(1993Q1-2013Q3) was investigated using quarterly data on inflation and
exchange relationships. First and second generation panel unit root tests were made to test the stability of the imported data.In order to determine whether
there is a cointegrated relationship between two variables, Pedroni Panel
Cointegration test and then Granger Causality test were made.There was a
long-term stable relationship for the two variables in their levels. The result of
the causality test, a unidirectional causal relationship from the real effective
exchange rate to inflation has been determined.
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