Exchange rate pass-through and monetary policy: Turkey 1990-2006

Since the first studies examining exchange rate pass-through and import prices todomestic prices, the focus of this interest has evolved considerably over time. In recentyears there has been a growing exchange rate pass-through literature in the context ofnew open economy macroeconomics and it plays a central role in heated debates overappropriate monetary policies and exchange rate regime optimality.A quick glance at the literature shows that most of the work on the exchange ratepass-through is about the developed countries and dominated by the questions on therole of exchange rates in external adjustment. In recent years there has been asubstantial increase in the number of the emerging countries that have adopted flexibleexchange rate regimes in the wake of the financial crises of the mid and late 1990?s. Thetiming of the interest for exchange rate pass-trough in emerging countries is not asurprise; it also depends on the same reasons as in the case of developed countries. Onthe other side, contrary to the developed countries, the interest on exchange rate pass-through in developing countries mainly focused on the inflationary effects of exchangerates.In this study, exchange rate pass-through to domestic inflation in the Turkisheconomy is analyzed. In the analyses, 1990:1-2006:4 period is investigated by using?Vector Error Corroection Model (VECM)?. According to VECM results, the responseof CPI to USD shocks matches the results of alike other studies for Turkey, andillustrates a quite weak positive response. In this way, exchange rate pass-through islow, and there is an incomplete pass-through. It is, however, conspicuous that thisrelation is positive and its maximum response has been continuing along simulationperiod (forwards ten quarter).