Relationship Between Exchange Rate and Inflation in Turkish Economy Post-2001 Crisis: VAR Analysis of the Exchange Rate Pass-Through

In this study, the pass-through effect of exchange rate on inflation in the Turkish economy post 2001 crisis is examined. This related period includes inflation targeting regime which is important in terms of monetary policy, and includes floating exchange rate that is important in terms of exchange rate regime. Within the transition to the inflation targeting regime, the main objective was determined as price stability, however, exchange rates have being kept among the macro variables that are referred to in the inflation targeting. In the study, the vector autoregressive (VAR) model is estimated by using the monthly data for the period of 2003: 1-2016: 12 of the aggregated supply-aggregated demand variables. In the light of findings obtained from the impulse-response, variance decomposition and Granger causality analysis have been applied within VAR model, it can be concluded that the crude oil import prices are more efficient in medium term and explain 28% of the variation of inflation rate; the exchange rate is more efficient in short term, and explains the 15% of the variation of inflation rate.