The pass-through effect of exchange rate movements on domestic prices: The case of Türkiye

The aim of this study is to determine how the dynamic effects of exchange rate movements on domestic prices (producer and consumer prices) in Türkiye have changed over time in an environment of increasing uncertainty and rising inflation expectations. To this end, a time-varying parameter vector autoregressive (TVP-VAR-SV) model with stochastic volatility was constructed using monthly data covering the 2013:M1-2025:M4 period. The findings of the study indicate that the exchange rate pass-through effect (ERPT) is not constant over time and has increased significantly. The ERPT coefficient for producer prices rose from approximately 0.4 at the beginning of the period to 0.85 at the end of the period. The pass-through to consumer prices showed an even larger increase, with the ERPT coefficient rising from approximately 0.2 to nearly 0.95, an increase of almost fivefold. In particular, the fact that pass-through to the CPI has exceeded pass-through to the PPI since the end of 2022 is an important finding that reveals the strengthening of the expectation channel and currency indexation in pricing behaviour. The results of the variance decomposition confirm that exchange rate shocks have become the main determinant of fluctuations in both the PPI and CPI inflation over time, and that these shocks account for approximately 70% of CPI volatility in the recent period. These findings indicate that the inflation dynamics in the Turkish economy have shifted from a cost-push structure to a structure that is largely exchange rate-indexed and expectation-driven.