Exchange rate and inflation relationship: The case of Turkey

In this study, the impact of exchange rate changes on domestic inflation in the Turkish economy is examined. The analyses cover monthly data from 2013-2021. The study is based on data from the 10 countries that Turkey imports the most from during the 2013-2021 period. Since most of the Turkish imports are based on two currencies, namely the US dollar and the Euro, the weighted exchange rate is calculated usingthe wieghts of these two currencies. The Consumer Price Index (CPI) and its subgroups are used to measure inflation. Regression analyses are conducted based on the study by Gagnon and Ihrig (2004). The model used in the regression aims to observe the effect of both consumer price index and exchange rate fluctuations on domestic prices. The R programming language is used for the analysis. Literature research shows that exchange rate volatility gains importance especially in periods of high and uncertain inflation. The analysis results also show that exchange rate volatility has an effect on general consumer prices during the period examined. Results of short-term and longterm volatility are also discussed.