Exchange Rate Pass- Through in Turkey: Looking for Asymmetries

Abstract

This paper uses the VAR framework introduced in McCarthy (1999) to investigate the nature and extent of pass-through to prices in Turkey. Furthermore, Threshold VAR (TVAR) models are used to assess the possibility of asymmetries in the pass-through. Annual change in the industrial production index, exchange rate and inflation as well as deviation of the change in annual exchange rate from its sample mean are used as threshold variables. The latter variable is used to capture asymmetric effects of small versus big changes in exchange rates on the extent of pass through. Estimating several TVAR models imply significant asymmetries in the relationship between exchange rate and inflation as measured by Wholesale and Consumer Price Indices. More specifically, we find that pass-through to prices is lower during significant economic contractions, periods with higher exchange rate depreciation and periods with lower inflation. Evidence for asymmetries that arise from the magnitude of the change in exchange rates is weaker and quantitatively not very significant.