The Role of Imported Inputs in Pass-through Dynamics

In this paper, we analyze the extent to which the use of imported inputs affects exchange rate and import price pass-through into domestic producer and consumer prices for services in Turkey. We first calculate the use of imported inputs on sectoral level by analyzing the input-output tables. Then, by taking the sectoral heterogeneity regarding the use of imported inputs into account, we estimate import price and exchange rate pass-through by utilizing import prices, producer prices (consumer prices for services) and output gap on sectoral basis. Our results point to a substantial heterogeneity across sectors in terms of exchange rate and import price pass-through. While the import price (in foreign currency) pass-through is in line with the share of imported input to a large extent, the pass-through of exchange rate shocks to domestic prices are generally higher than the share of imported inputs in costs inclusive of labor. Our findings also reveal that this excess exchange rate pass-through has strengthened over the recent period. Additional analyses carried out reveal that the high share of foreign currency debt is associated with higher exchange rate pass-through, suggesting that the management of foreign exchange liability might play a critical role to enhance the effectiveness of monetary policy and to create room for maneuver to fight against inflation by reducing the excess exchange rate pass-through.