Exchange rate pass-through in the Turkish economy

The Turkish economy has faced high inflation from time to time since the late 1930s. On the other hand, the Turkish economy has undergone economic liberalization after the 1980s and has opened its economy to global markets with the impact of globalization. After the 2001 economic crisis, the floating exchange rate system was introduced and exchange rate fluctuations started to be cited as a cause of inflation. Especially the exchange rate shock in 2018 and the subsequent depreciation of the exchange rate followed by an inflationary period made this question popular again. In this framework, this study aims to reveal the pass-through of exchange rate fluctuations to consumer inflation in the Turkish economy. Considering the data of the Turkish economy for 2021, it is observed that the majority of imports are intermediate goods and capital goods. Therefore, the econometric model is constructed to measure the exchange rate pass-through through the imported input costs channel. The analysis covers the period 2003-2022. The econometric results show that the imported input costs channel is effective in exchange rate pass-through. Changes in the exchange rate affect imported input costs, imported input costs affect producer prices and producer prices affect consumer prices in the same direction and in a statistically significant manner. Moreover, changes in exchange rates have a statistically significant and positive effect on consumer prices directly. Keywords: Exchange Rate, Inflation, Exchange Rate Pass-through, Imported Input Costs, VAR.