Abstract
In this study, we provide empirical evidence on the asymmetric relationship between the cost of crude oil and retail price of gasoline in Turkey. We disentangle the cost channel into two parts: the crude oil price in foreign currency and exchange rate. Then, we estimate the determinants of retail prices via an NARDL model that addresses asymmetry in both the long-run and the short-run. We show that the impacts of the two channels differ in a significant way. In particular, the transmission of an exchange rate shock to the retail price is more rapid and more significant in magnitude compared to that of a shock to crude oil price in foreign currency. Our results show that the source of asymmetric relationship is mainly exchange rate. While the response of retail price to currency depreciation is more rapid and larger in magnitude compared to that of appreciation, its response to the movements in crude oil price in foreign currency is largely symmetric. Finally, the estimation results reveal that moderate changes in exchange rate and international price of crude oil are hardly reflected to the retail price.
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