Pass through effect of exchange rates: The case of Turkey (2003-2022)

Exchange rates in open economies have impacts on domestic and foreign economic activities via different channels. For instance, while changes in exchange rates may have impact on variables such as foreign debts, foreign investments and imports and exports, they may also affect the domestic prices. The changes in exchange rates in open and import dependent economies may affect the consumer, producer, export and import prices. This effect on the prices is defined as "exchange rate pass-through effect". The aim of this study is to analyze the exchange rate pass-through effect in terms of Turkish economy. The monthly data between the period January 2003 – February 2022 was used in this study. The pass-through effect was analyzed with Johansen Cointegration Test and Toda Yamamoto Causality Analysis by using the variables of Nominal Exchange Rate, Consumer Price Index (CPI), Producer Price Index (PPI), Export Unit Value Index and Import Unit Value Index. The results of Johansen Cointegration Text demonstrated a long-term cointegration relationship between exchange rate and CPI, PPI and import unit value index. However, no cointegration relationship was analyzed between exchange rate and export unit value index. The results of the Toda Yamamoto causality analysis revealed that there was a mutual causality between exchange rate and CPI and PPI and a unidirectional causality between exchange rate and export unit value index. However, no causality was found between exchange rate and import unit value index. According to the findings of the study, there is a strong long and short term pass-through effect in Turkish economy. Therefore, a stable and consistent exchange rate is important for a low inflation rate in Turkey. As a consequence, the adoption of monetary and fiscal policies to provide stability of exchange rates should be prioritized.