Exchange rate pass-through under macroprudential policies in Turkey: An analysis of time-varying parameter models

The fragile structural features of developing countries make them more vulnerable to external shocks. Thus, the effects of external shocks may be more costly in developing countries than in developed countries. Crises after financial liberalization point to the decisive role of external shocks in inflation dynamics. Therefore, the price level is the most important feature of an emerging economy as Turkey is very sensitive to these shocks. Understanding the effects of external factors on inflation as well as monetary authorities, economic agents and firms are closely monitored in terms of implementation of monetary policies, pricing strategies and expectations. In this study, the pass-through effect of external factors on producer and consumer prices is examined with emphasis on the exchange rate pass-through. For this purpose, the time-varying vector autoregressive (TVP-VAR) method was used to estimate the pass-through parameters by using monthly data between January 1985 and December 2018. The findings show that the pass-through of external factors to producer and consumer prices is not linear but changes with time. Although the pass-through effect of reduced compared to previous years in Turkey under macroprudential policies again shows an increasing trend in the last period. It concluded that the dynamics of inflation in Turkey is very sensitive to external factors and indicate a structural problem still continues. Furthermore, the pass-through effect on producer prices is higher than the pass-through effect on consumer prices.