Geri Anasayfa

Detay


Analysis of the Relationship Between Exchange Rate and Inflation in Turkey by VAR Technique (2005-2017)

Abstract
High inflation is one of the main problems of developing countries. In order to achieve economic stability within the country, the inflation rate should be closely monitored. Such issues as the realization of economic growth, reaching the economic objectives and maintaining competitiveness in the global arena can be achieved through a macroeconomic performance based on price stability. İn parallel to an increase in exchange rate, the general level of prices is expected to increase. An increase in the exchange rates tend to increase the level of prices significantly, especially in countries with an externally dependent production structure. The price of imported goods is driven up by a raising exchange rate and this increase impacts first the producer, then the consumer respectively. For this reason, it is necessary to evaluate the relationship between inflation and exchange rate and to design specific policies for price stability within the country by taking into account the effect of exchange rates. In this context, the significant impact of exchange rate policies on keeping internal and external balance and on inflation is a factor that should be calculated and taken into account. In this study, the relationship between exchange rate and inflation in Turkey for the 2005-2017 period is analysed by VAR Technique. In addition, the existence of a bi-directional causality relationship between inflation and exchange rate is demonstrated by Granger causality test. Lastly, the effects of the variables on one-unit shocks are examined by impulse response analysis and descriptive power of the variables are evaluated by variance decomposition. The results of the study show that exchange rate pass-through is high in Turkey and exchange rate is one of the main determinants of inflation.

Keywords
Inflation, Exchange Rate, VAR Analysis