Exchange Rate Pass Through On Prices: The Case Of Turkey

When examining the economic literature, in the analysis of macroeconomic indicators, exchange rate is considered as one of the most important variables.. Exchange rate is among the basic explanatory variables that explain inflation such as unemployment, wages and money supply. The increases and decreases occurred in the exchange rate are explained pass through theory. In this study, the pass through effect is analyzed using econometric methods. This study examines the pass-through effect of exchange rate on consumer and producer prices for Tukey using vector autoregression (VAR) models. The analysis made for the 2005:01 – 2015:04 period are calculated as transitivity’s pass-through effect in a period of a year from the exchange rate to the prices both as CPI (Consumer Price Index) inflation and the PPI (Producer Price Index) and magnitude. The reaction to producer prices against the shock of one unit in exchange rates is calculated and the effect’s completion time is determined. In the study, it is determined that the pass-through effect from exchange rates to consumer prices is inclined to decline. It is observed that the reaction of the consumer prices to the shock of one unit in the exchange rate is lower than the reaction given to the producer prices. There can be found many studies in the literature about developed countries and the role of exchange rates on exterior arrangements and the number of studies made on this suject in developed countries increases rapidly. In these studies the focus is on the examination of the role of exchange rates on exterior arrangements along with the mechanism of effecting firstly the importation prices and then the market prices of all the local manifacture which are produced using import inputs upon the increase of exchange rates’ increasing the imported products’ value in domestic currency.In the introduction part of the study pass-through notion is examined and the relationship between exchange rate and price index is dwelled on. In the lirerature view the studies conducted about the pass-through effect are examined and lastly, the duration and the magnitude of the pass-through from exchange rate to prices in Turkey is investigated.