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An Investigation of Asymmetries in Exchange Rate Pass-Through to Domestic Prices

In: Advances in Econometrics, Operational Research, Data Science and Actuarial Studies

Author

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  • Fela Özbey

    (Çukurova University)

Abstract

After the 2000–2001 financial crisis in Turkey, a strong reform program was initiated involving the enactment of the floating exchange rate regime in February 2001 and the adoption of inflation targeting as monetary policy in January 2002. This study aims to analyze the dynamics of exchange rate pass-through (ERPT) for the inflation-targeting period in Turkey by estimating the magnitudes of the short-run and long-run pass-through and by testing whether these magnitudes differ in contexts of depreciations and appreciations. To this end, the nonlinear autoregressive distributed lag (NARDL) approach is used. Since the bounds-testing procedure does not allow for stochastic seasonality or nonseasonal integration orders higher than one, to check the suitability of the series for this methodology, both seasonal and nonseasonal unit root tests are performed. The empirical results reveal asymmetry in the ERPT in both the short run and long run. In the long run, whereas appreciations of the domestic currency are not transmitted to domestic prices, the pass-through of depreciation is 43%. In the short run, the pass-through of appreciations is realized only in the current month and is 10.5%. The short-run pass-through of depreciations fluctuates over seven periods, and the total pass-through is approximately 3.5%.

Suggested Citation

  • Fela Özbey, 2022. "An Investigation of Asymmetries in Exchange Rate Pass-Through to Domestic Prices," Contributions to Economics, in: M. Kenan Terzioğlu (ed.), Advances in Econometrics, Operational Research, Data Science and Actuarial Studies, pages 207-219, Springer.
    • Handle: RePEc:spr:conchp:978-3-030-85254-2_12
    DOI: 10.1007/978-3-030-85254-2_12
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