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Asymmetries in Exchange Rate Pass-through in Turkey: A Threshold VAR Analysis

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  • Meryem Türel
  • Ayhan Orhan

Abstract

This paper analyses the asymmetric behaviour of exchange rate pass-through in Turkey using a threshold VAR model. The main purpose is to examine the asymmetries in the exchange rate pass-through based on size, direction and inflationary environment of an emerging market economy with a highly depreciated domestic currency and two-digit inflation rate. Monthly exchange rate movements and monthly inflation rates were used as threshold variables. Nonlinear impulse response functions were employed to compare upper and lower regimes. According to our findings, the transmission of exchange rate shocks to domestic inflation in the upper regime is stronger than that in the lower regime. The pass-through increases with the magnitude of shocks. Besides, positive shocks have more effect on domestic prices than negative shocks, especially in the upper regime. A positive relationship between inflation and exchange rate pass-through exists. During high inflation periods, pass-through to domestic prices increases.

Suggested Citation

  • Meryem Türel & Ayhan Orhan, 2022. "Asymmetries in Exchange Rate Pass-through in Turkey: A Threshold VAR Analysis," Prague Economic Papers, Prague University of Economics and Business, vol. 2022(3-4), pages 276-295.
    • Handle: RePEc:prg:jnlpep:v:2022:y:2022:i:3-4:id:806:p:276-295
    DOI: 10.18267/j.pep.806
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    More about this item

    Keywords

    Exchange rate; pass-through; inflation rate; threshold VAR;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications

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