Sources of Asymmetry and Non-linearity in Pass-Through of Exchange Rate and Import Price to Consumer Price Inflation for the Turkish Economy during Inflation Targeting Regime

Some recent studies indicate that exchange rate pass-through and import price pass-through is better characterized in a non-linear way. Having a better understanding of non-linearity of exchange rate pass-through (ERPT) and import prices pass-through (IPPT) under different conditions will contribute to the critical decisions on the proper role and magnitude of the exchange rate movements in the monetary policy. In this paper, we implement a state based non-linear method (Markov process) to identify, decompose, quantify and analyze the nonlinearities for both types of concurrent (same period) pass-through for the years between 2003 and 2014 for the Turkish economy. According to the results, both ERPT and IPPT are lower during appreciation and low volatility periods of nominal exchange rate. Even though ERPT does not differ depending on the level of business activity, IPPT is lower during contractionary periods compared to expansionary periods. The findings in this paper will allow for more nuanced monetary policy approaches to deal with pass-through stemming from different sources.