Impact of exchange rates variations on inflation: an application onto Turkey

Turkey is a country struggling against high inflation rates and applying a variety of policies in order to lower inflation for many years. On the other hand, Turkey runs several policies in order to lower inflation rates as well as assuring financial stability. In line with such objectives, inflation targeting strategy is one of the policies that are in application since 2002. For developing countries, impact of exchange rates on inflation is rather important; because there is an intimate relation between exchange rates and general level of prices. Such relation called "pass-through" is important for keeping general level of prices under control in terms of economies of developing countries. Acceleration of capital movements is effective on exchange rate stability particularly in recent years. . On the other hand, Turkey runs several policies in order to lower inflation rates as well as assuring financial stability. In line with such objectives, inflation targeting strategy is one of the policies that are in application since 2002. Accordingly, any instability in exchange rates has an impact on the economies of developing countries by means of Pass-Through effect, and hinders lowering of inflation rates to desired levels. In this study examining the impact of variations in exchange rates on inflation targeting process in Turkey, the relationship between exchange rates and inflation in the period of 2010:01-2018:03 was investigated by means of the Autoregressive Distributed Lag model. Based on the findings obtained in the model, it is concluded that impact of variations in exchange rates on domestic prices are high, and likewise, import prices increase in parallel to the increases in exchange rates, eventually leading to rise inflation rates. Keywords: inflation targeting, pass-through, ARDL