Abstract
This paper examines the relationship between exchange rate pass-through (ERPT) and inflation within dynamic structure, focusing on the impact of exchange rate changes on consumer prices (CPI) in Türkiye. The theoretical and empirical analysis builds on existing frameworks, considering how central banks’ reactions to exchange rate movements play a crucial role in shaping inflationary dynamics. The study uses the ARDL model to analyse the long-term and short-term effects of exchange rate fluctuations on inflation, focusing on the interaction between the CPI and the nominal exchange rate (NEX). For these goals, we employed monthly data over the January of 2000 and August of 2024. The analysis is based on two baseline models: the first examines how changes in the exchange rate directly impact the CPI, while the second assesses the rate of change in inflation due to exchange rate variations. Stationarity of the data is ensured through unit root testing, which confirms the appropriateness of using the ARDL model. The results reveal that exchange rate movements significantly affect CPI, with a 1% increase in the exchange rate leading to a 1.1625% increase in th e CPI in the long run, as evidenced by a p-value of 0.00. Additionally, in the short term, a 1% increase in the exchange rate results in a 0.1164% rise in the CPI, indicating a persistent effect on prices. The error correction term further supports the existence of a significant relationship between the CPI and the exchange rate in both short and long-term dynamics. Based on model 2, exchange rate changes have a significant effect on inflation in the long-term relationship. In particular, it has been shown that exchange rate increases can lead to long-term increases in inflation.
Published Version
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