THE IMPACT OF EXCHANGE RATE SHOCKS ON INFLATION EXPECTATIONS IN TÜRKIYE

Abstract

This study examines the impact of macroeconomic shocks, represented by exchange rate volatility, on inflation expectations. Using data for the period 2006:04-2023:11 and the structural VAR method, the analysis examines the direct effect of macroeconomic shocks on short-term inflation expectations and the indirect effect on long-term inflation expectations. The results have shown that macroeconomic shocks have a direct effect on short-term inflation expectations and an indirect effect on long-term inflation expectations via short-term inflation expectations, which is referred to in the literature as the pass-through effect and shows that the uncertainty channel is active. Our results suggest that the Central Bank of the Republic of Türkiye (CBRT), which wants to keep short- and long-term inflation expectations under control, should also take into account macroeconomic shocks, represented by exchange rate shocks, when determining policy instruments.