Abstract
Turkish economy continued to rapidly opening up to the outside for the last 40 years. It has long been in the top 20 largest economies in the world. Exchange rate is an important variable affecting micro and macro variables in the economy. This study aims to investigate the effect of exchange rate changes on the producer and consumer prices in Turkey by using the VAR model. Results show that the degree of transition with effect-response functions and how the prices were affected by variance decomposition by using the 2005-2019 monthly data. CPI's response to the change in nominal exchange rate was found to be greater than PPI. The end of the impact is shorter than CPI’s impact.
Highlights
In an open and highly integrated economy, the exchange rate affects most of the macroeconomic variables
The effect of exchange rate changes on domestic prices in an open economy is known as ERPT (Exchange Rate Pass-through)
We forecast VAR model in section Empirical Results, and this study provides a discussion of the main results and highlights some policy implications
Summary
In an open and highly integrated economy, the exchange rate affects most of the macroeconomic variables. Openness of the Turkish economy has accelerated dramatically since the January 24, 1980, program. The depreciation of TL (Turkish Lira) mainly affects prices in two ways. These are the increase in the cost of imports in terms of TL and the increase in prices of imported inputs. The effect of exchange rate changes on domestic prices in an open economy is known as ERPT (Exchange Rate Pass-through). The level of ERPT is closely linked to monetary policy, as it directly affects inflation rates. The degree of pass-through determines how firms and households are affected by external shocks [1]
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