Do Exchange Rates Affect Inflation Evidence from Emerging Market Economies

Abstract

After the 1980s, chronic inflation in Turkey has shaken confidence in the domestic currency, and thus operating debit-credit transactions through dollars. The aim of this paper is to analyse the impact of exchange rate pass-through into inflation in both Turkey and emerging market economies that were highly dollarized and shifted to a flexible exchange rate regime, together with inflation targeting policy in an attempt to switch to the advanced economy. This paper also studies whether stabilization programs under flexible exchange rate regimes and particularly inflation targeting policy may have eliminated dollarization in the periods 1995-2001 and 20022010.