Exchange rate pass-through: Case of Turkey

Pass through is defined as the effect of change in foreign exchange rate on domestic prices. If foreign exchange movements fully reflect on deomestic prices, there is complete pass through.High levels of foreign trade increase the importance and interest in pass through. Especially in devoloping countries such as Turkey the degree of pass through can be observed higher when compared with developed countries. High pass through first increases foreign good prices, then increases domestic prices. Low pass through effect consdiered as a positive impact which decreases the pressure of foreign prices.In this study, pass through coefficients are measured through structural vector autoregressive model, impulse response function and variance decomposition methods using the monthly data between June 2001 and May 2012. Results suggest that pass through effect in Turkey is considerably low and the effect continue 8 months. Pass through effects on foreign good price index, and consumer price are 9 % which is relatively small when we compare with pass through effect on production endex which is 30 %.Key words; Exchange rate, Pass Through, Structural vector autoregression model.