Estimation of exchange rate pass through effect on consumer price index and sub-categories by ARDL and NARDL methods: Turkish case

Trade relations between countries have increased with the effects of globalization that started towards the end of the 1970s. In order to adapt to this situation, countries had to take new steps. One of these steps was the implementing of a floating exchange rate regime instead of a fixed exchange rate regime. The concept of exchange rate pass- through effect has gained importance, especially since changes in the exchange rates of developing countries affect local markets and welfare levels. Exchange rate pass- through effect can be explained as the change effect caused by uncertainties in the nominal exchange rate on import prices. As a result, it has been determined that the transition effect is generally effective on developing countries, which has an import- led economic activity, like Turkey. In this study, the effects of changes in exchange rates on consumer prices and their main categories are examined. Augmented Dickey Fuller (ADF) and Phillips Perron (PP) unit root tests are employed to determine the integration degree of selected variables. After determining the integration degree, the autoregressive lagged distribution (ARDL) method and nonlinear bounds test approach (NARDL) are applied over the sample 2006.01-2023.05. Furthermore, error correction models (ECM) are estimated in the short-time. As a result, the importance of the exchange rate transition effect for Turkish economy has been determined and policy implication given.