The correlation between the inflation and the change in foreign exchange rates in Turkey

Inflation, which is one the most important terms in economics and many countries struggle with, refers to permanent and significant increases of prices.Turkey is a country is a country which has experienced high and chronic inflation period and tried to cope with it since the late 70?s on account of several crisis and negative incidents. One of the most important facts of economics is to follow a low level inflation policy in order to provide and sustain economic stability.Another significant term of economics is the foreign exchange rate which is the swap ratio between two national currencies. Instability in the foreign exchange markets of all countries has increased due to the shock which is a consequence of the increase in oil prices and the abolishment of Bretton Woods system. As a result of instability in foreign exchange markets, national or international fluctuations have affected welfare levels of countries negatively. Moreover, fluctuations in foreign exchange rates affect domestic prices by increasing the costs of import sectors. Thus, it is possible to claim that an increase in foreign exchange rates makes the inflation go up. Furthermore, if the national currency loses value, people flee from the national currency and this causes the exchange rate to increase. It can be deduced from the facts given above that there is a significant correlation between the exchange rate and the inflation. Therefore, the aim of this study is to analyze the effect of foreign exchange rate fluctuation on the inflation. So as to achieve this, required economic and econometric analyses have been made and by using real effective exchange rates between 1983-2009 and consumer price index data, time series have been studied and then the results have been interpreted. As result of the study, it is obtained that there is a two-way directed realitions between consumer price index data and real effective exchange rates.