Exchange rate pass throug on prices: Case of Turkey

The onset of fluctuating exchange rate application right after the collapse of Bretton Woods system caused exchange rate pass through become an important research area of both theoretical and empirical literature. In this study, in order to examine influence of exchange rate pass through on domestic, imports and exports prices of Turkey, analysis was performed taking the outstanding models in literature as starting point and using euro and dollar as exchange rates separately. The monthly data covering the 1989:08-2010:11 period were used for the variables in the analysis. Moreover, sub-period distinction was also made in the analyses. For stationary analysis of the series ADF and PP tests were used while Johansen co integration test was applied in order to determine the existence of co integrated vector relationship among the series.As a result of the analysis conducted, it was determined that influence of exchange rate pass through coefficients on domestic prices has decreased since 2001:03 period when transition to fluctuating exchange rate was realized, also that euro has had higher influence compared to dollar in this period, and that the influence of the exchange rate pass through coefficients on imports is low in long term and finally for the export prices the exchange rate pass through coefficients dollar is high. Opposite results of the expected effects for short term analysis were reached. This situation was interpreted as the firms evaluate the shocks experienced in reflection of the changes in the exchange rate on prices as permanent or temporary, and they do not make price adjustments because they expect the effects go by in short term.Key Words: Exchange Rate, Pass Through, VAR, Impulse Response Function, Vector Error Correction Model.