Exchange rate pass-through: Example of Turkey

One of the main challenges for the inflation targeting countries has been to assess the impact of import price and Exchange rate shocks on domestic price measure. This is often called as ?Exchange rate (or import prices) pass-through theory?.In the literature of the exchange rate pass-through on which there are plenty of studies that analyze the role of exchange rate on external adjustments for developed countries, there is a remarkable increase of similar studies for developing ones.These studies, besides the analysis of the role of exchange rate on external adjustment, were focused mainly on a mechanism such that an increase of exchange rate rises the value of imported goods on domestic currency, through that initially import prices, then prices of domestic goods on the market that are manufactured using imported input are effected unlike it is in developed countries.In this study, an analysis of exchange rate pass-through on Turkey was done; in other words, the pass-through of exchange rate on import prices in Turkish economy was evaluated. In practice, through Johansen?s Co integration Analysis 2001:01-2008:10 periods was analyzed. According to results of the analysis, elasticity of import prices on exchange rate is higher in the short-term than it is in the long-term and the system?s ability to equilibrate emanates mostly from exchange rate.