Exchange rate pass-through to domestic prices in Turkish economy

Alper, Koray
In this study, determinants and the evolution of the exchange rate passthrough to domestic inflation in the Turkish economy is analyzed. The analyses cover the 1987-2003 period. In the analyses, single equation أError Correction Modelsؤ are used to estimate the exchange rate pass-through. Estimation results suggest that alike other emerging countries, the degree of exchange rate passthrough to domestic prices is high and the pass-through is completed in a very short time span. Estimations results also indicates that the main factors to account for high pass-through are the past currency crises and the high degree of openness of the economy. These factors create the ground for the indexation behavior of agents. Although, above-mentioned factors are the main determinants of the degree of exchange rate pass-through, the persistency and the volatility of exchange rates can significantly affect the short run dynamics of the pass-through. The results imply that even if the pass-through slows down due to the changing pattern of exchange rates, to achieve the low and stable inflation in the long run, fundamental factors that exacerbate the link between exchange rates and prices should change.


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Citation Formats
K. Alper, “Exchange rate pass-through to domestic prices in Turkish economy,” M.S. - Master of Science, Middle East Technical University, 2003.