Pass-through effects of exchange rate on inflation: The case of Turkey

Year 2020, Volume: 2 Issue: 2, 71 - 75, 31.12.2020

Utku Altunöz

Abstract

In this study, the effect on inflation will occur volatility in the exchange rate in Turkey is examined. ARDL Boundary Test is preferred for the 2010-2018 period. Domestic producer price index (PPI) were used as a independent variable and weighted nominal exchange rate (EXC), world crude oil prices (OIL), domestic money supply (M3) and the capacity utilization rate (CUR) were used as dependent variables. According to the results, 1% increase in nominal exchange rate, 0.11% increase in domestic producer price index and 1% increase in world oil prices increase the producer price index by 0.07%. Similarly, a 1% increase in M3 money supply, a 0.28% increase in the producer price index and a 1% increase in the capacity utilization rate lead to a 0.31% increase in the producer price index. It is also understood that all variables in the model increase inflation. However, according to the findings, the long-term effects of the exchange rate effect on domestic prices remain low. In addition, the lowest transition effect on producer prices is attributable to crude oil prices. The other two variables M3 and the capacity utilization rate have a stronger effect on domestic prices than the exchange rate effect. The other two variables M3 and the capacity utilization rate have a stronger effect on domestic prices than the exchange rate effect.

Keywords

Pass-through, inflation, exchange rate

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