Analysis of exchange rate pass-through in high-inflation G20 countries

The effect of exchange rate changes on the general price level is called exchange rate pass-through. As countries' openness to the outside world increases and financial markets deepen, determining the impact of exchange rates on prices has become an important issue. The link between exchange rate pass-through and the inflation environment was established in a study by Taylor (2000). It is accepted that the primary causes of inflation are changes stemming from demand, supply, and exchange rates. The aim of this study is to make determinations regarding the pass-through from exchange rates to producer and consumer prices in G20 countries with high inflation, including Turkey; to evaluate these countries together within the framework of these determinations; and to reveal Turkey's place among these countries in terms of exchange rate pass-through. This study, using VAR and VECM models, also identified the effects of supply and demand shocks and monetary policy elements on domestic prices using a supply chain approach. The study's findings supported Taylor's assertion that high inflationary environments lead to high exchange rate pass-through. Furthermore, it concluded that the success of inflation targeting and the de facto independence of central banks are important in reducing the pass-through from exchange rates to prices. The study's findings also include the persistent impact of exchange rate shocks in high inflationary environments, high exchange rate pass-through in fragile economies, a higher impact of supply shocks on prices in energy-importing countries, and a greater impact of exchange rate and supply shocks on prices than demand shocks. It was determined that exchange rate changes are the primary source of increases in domestic prices in Turkey, and that monetary policy plays a significant role in reducing pass-through.