Pass-through of exchange rates to domestic prices in Turkey

With globalization the impact of exchange rates on inflation, the most important macroeconomic factor gained importance. The inflationary effects of exchange rates on domestic prices are called exchange rate pass-through effect in the literature. The exchange rate pass-through effect increases the value of imported goods in terms of national currency and raises the prices of imported intermediate goods used in production, raising the prices of domestic goods. If increase in the exchange rates in a country is reflected in the prices of the domestic goods in the same way, then it means the full transition effect. On the other hand, if the increase in the exchange rate does not reflect the same rates that means there is a partial trasition. In this study, which examines the transition from foreign exchange rates to domestic prices in Turkey, the SVAR model was estimated by using data from 174 month covering the period from January 2003 to June 2017. As variables, the duration and grade of the transition effect was examined by using exchange rate, import unit value index,manufacturing industry price index and TUFE, impulse response analysis and variance decomposition. As a result of the impulse response analysis, the transition effect of the exchange rates was seen to have ceased after the third period. As a result of the variance decomposition analysis carried out in the study, an increase in the exchange rates has been reached as 49% in manufacturing industry prices and 10% in TÜFE.