The relationship of exchange rate pass through with D-PPI and CPI: A case study of Turkey

In today's world, with the increasing pace of international trade, the significance of the concept of foreign exchange has been growing. Fluctuations in exchange rates hold particularly greater importance in developing economies like Turkey compared to developed countries. This is mainly due to the relatively high share of imports in developing country economies. Movements in exchange rates, whether upward or downward, have a significant impact, especially on prices through the channel of imports. As a result, the concept of exchange rate pass-through emerges. There are numerous studies in the literature regarding the impact of exchange rates on inflation. In this study, the relationship between exchange rate pass-through and inflation in Turkey is examined using Vector Autoregressive Regression Analysis based on monthly data for the period from 2006:1 to 2022:12. Firstly, the stationarity of the variables is tested using the Augmented Dickey-Fuller (ADF) and Kwiatkowski, Phillips, Schmidt, and Shin (KPSS) traditional unit root tests. Then, VAR Granger Causality analyses are executed. The study puts forth that there is an unidirectional causal relationship from the exchange rate index and import unit index to the producer price index (PPI). Additionally, a unidirectional causal relationship is observed from the exchange rate index to imports and from imports to the consumer price index (CPI).