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Asymmetric Exchange Rate Pass-Through into Inflation in Turkey: A NARDL Approach

Author

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  • Nazlı KARAOÄžLU
  • Baki DEMÄ°REL

Abstract

Inflation expectation resulting from the exchange rate increases is one of the widely discussed topics in the literature. The extent of the effect of exchange rate pass-through on inflation, and the duration of the impact are essential data that should be considered in determining disinflation policies. The literature findings show that the high level of rises in the exchange rate pass-through much faster on inflation, especially in dollarized economies with high inflation inertia. On the other hand, it has been revealed that the relationship between exchange rate inflation is asymmetrical. The Turkish economy, which struggles with chronicle higher inflation, has experienced a currency crisis in 2018. Therefore, to analyse the effect of exchange rate on inflation in Turkey is very important for the effectiveness of the fight against inflation and developing a policy proposal in this direction. This study examined the asymmetric relationships between exchange rate and inflation using a nonlinear autoregressive distributed lag model for 2004:Q1 – 2019:Q4. Findings indicate that the exchange rate pass-through into inflation is asymmetric in Turkey in the long-run. Besides, a decrease in the exchange rate has no statistically significant effect on inflation, but an increase also increases inflation in the short-run.

Suggested Citation

  • Nazlı KARAOÄžLU & Baki DEMÄ°REL, 2021. "Asymmetric Exchange Rate Pass-Through into Inflation in Turkey: A NARDL Approach," Fiscaoeconomia, Tubitak Ulakbim JournalPark (Dergipark), issue 3.
    • Handle: RePEc:fis:journl:210303
    DOI: 10.25295/fsecon.925369
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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