The relationship between inflation and exchange rate in the Turkish economy is remarkable. While indirect effects of exchange rate on inflation occur through the cost channel, direct effects emerge through the consumption channel. In addition, changes in the exchange rate affect pricing decisions through the indexing channel. This study examines the effects of the exchange rate on general inflation and certain subcomponents for 2003Q1-2020Q1. For this purpose, it uses linear and nonlinear ARDL models. In the linear model results, while the short-term effects of the exchange rate occur at different rates, the long-term effects are more robust. According to the estimation results of the nonlinear model, exchange rate movements (increase-decrease) in the short run cause changes at similar rates in general prices. The findings indicate that the exchange rate is the primary determinant of inflation. In the long run, this effect is more substantial. Moreover, the asymmetries in the subcomponents are striking. While the exchange rate increases are reflected in the prices, the effect of the exchange rate decreases is insignificant. The fact that similar effects are observed in the long term can be explained by the upward trend in the exchange rate. The strong relationship between exchange rate and inflation also weakens the effectiveness of the monetary policy. In order to conduct an effective monetary policy, it is necessary to solve the structural problems of the economy and improve the production structure. In addition, economic policy should consider the stability of the exchange rate.
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