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A New Test of Exchange Rate Pass-through in a Small Open Economy: Evidence from Asymmetric ARDL Bounds Approach

Author

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  • Serkan ÇİÇEK

    (Muğla Sıtkı Koçman Üniversitesi)

  • Çiğdem BOZ

    (Maltepe Üniversitesi)

Abstract

In this paper, we investigate the asymmetric effect of exchange rate movements on prices in both expansion and recession cycles for the inflation targeting (IT) period in Turkey, from 2002:M1 to 2012:M10, by using a co-integrating non-linear auto regression distributed lag (NARDL) model. This method enables us to analyse an asymmetric short and long-run relationship between nominal exchange rate and domestic inflation rate. According to alternative calculations of depreciation and appreciation series, our results indicate that depreciation is passed through prices in the long run for all alternative series in expansion cycle, but appreciation is only passed through if the appreciation rate is calculated by more than four previous periods. Our findings further suggest that the magnitude of depreciation on prices is larger than appreciation. However, in the short run, although depreciation is passed through to the prices, appreciation is not. This finding implies that prices are sticky downwards but flexible upwards in the short run and business cycle is the main source of asymmetry.

Suggested Citation

  • Serkan ÇİÇEK & Çiğdem BOZ, 2013. "A New Test of Exchange Rate Pass-through in a Small Open Economy: Evidence from Asymmetric ARDL Bounds Approach," Iktisat Isletme ve Finans, Bilgesel Yayincilik, vol. 28(333), pages 43-64.
    • Handle: RePEc:iif:iifjrn:v:28:y:2013:i:333:p:43-64
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    Citations

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    Cited by:

    1. Gayaker, Savas & Ağaslan, Erkan & Alkan, Buket & Çiçek, Serkan, 2021. "The deterioration in credibility, destabilization of exchange rate and the rise in exchange rate pass-through in Turkey," International Review of Economics & Finance, Elsevier, vol. 76(C), pages 571-587.
    2. Alsamara, Mouyad & Mrabet, Zouhair & Dombrecht, Michel, 2018. "Asymmetric import cost pass-through in GCC countries: Evidence from nonlinear panel analysis," Economic Modelling, Elsevier, vol. 75(C), pages 432-440.
    3. Gizem BAS & Mehmet KARA, 2020. "Exchange Rate Pass-Through on the Domestic Prices: Evidence from the Turkish Economy," Isletme ve Iktisat Calismalari Dergisi, Econjournals, vol. 8(2), pages 115-125.

    More about this item

    Keywords

    Asymmetric Exchange Rate Pass-Through; Non-linear ARDL; Inflation; Turkish Economy.;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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