The analysis of pass through effect between exhange rates and traded goods prices in Turkey

The relationship between nominal exchange rate and the prices of traded goods known asexchange rate pass through effect is a theoretical and empirical issue that examined followingsignificant the time lags have been seen in the adjustment process of trade balance toexchange rate changes despite Marshall-Lerner Condition was satisfied.In this study has been estimated exchange rate pass through towards to export andimport prices in Turkish economy by using Recursive Vector Auto Regression (VAR) withmonthly data between 1988 and 2004, taken in to account the exchange rate regime andmonetary policy changes in the February 2001.The model estimation results reveal that (i) the use of imported inputs in theproduction -exportation chain, together with inflationary pressures in the economy haveinfluenced negatively to improving competitiveness via Turkish Liras depreciation in the firstperiod. (ii) However, exporter firms have begun to make decision in terms of foreign currencyinstead of Turkish Lira, along the process of domestic production and export pricing in thesecond period. Therefore, the changing?s in exporter firms? pricing behaviour and exchangerate dynamics due to floating exchange rate and implicit inflation targeting regimes have leadto impressive export increases in Turkish economy last years. (iii) The pass through effecttowards to domestic import prices has declined substantially as a result of successfuldisinflation policies in the second period that supported to Taylor Hypothesis.