Exchange Rate Pass-Through in Turkish Republic of Northern Cyprus

Advancements in transportation and technology coupled with the liberalization of the trade policies across nations have led to significant growth in the volume of trade worldwide in the last several decades. Exchange rate fluctuations, which directly affect the prices of goods traded between countries, are important for the exporting and importing countries. The exchange rate pass through, which is the main focus of this study, shows how import and export goods’ prices change due to exchange rate fluctuations. The collapse of the Bretton Wood, increase in the share of the developing economies trade globally, have made the topic of exchange rate pass through to become more important in the globalized world. This research is conducted in a very small economy, Turkish Republic of North Cyprus (TRNC), who has limited trade and financial integration with the world. The thesis analyses and determines the degree of pass through in TRNC using VAR method. In this respect, monthly inflation rate, electricity price changes, and exchange rate changes from January 2000 to September 2019 was used. The study attempts to measure the impact of foreign exchange rate (Euro) changes on consumer price index (CPI) in TRNC. The result of the research finds that changes in exchange rates have significant pass through effect on the consumer price index and the ERPT effect disappears only by the fifth month. The accumulated ERPT effect on CPI was estimated to be around 35% by the fifth month. The research also found that electricity price changes affect the CPI significantly.