Asymmetries in Exchange Rate Pass-through in Turkey: A Threshold VAR Analysis

Abstract

This paper analyses the asymmetric behaviour of exchange rate pass-through in Turkey using a threshold VAR model. The main purpose is to examine the asymmetries in the exchange rate pass-through based on size, direction and inflationary environment of an emerging market economy with a highly depreciated domestic currency and two-digit inflation rate. Monthly exchange rate movements and monthly inflation rates were used as threshold variables. Nonlinear impulse response functions were employed to compare upper and lower regimes. According to our findings, the transmission of exchange rate shocks to domestic inflation in the upper regime is stronger than that in the lower regime. The pass-through increases with the magnitude of shocks. Besides, positive shocks have more effect on domestic prices than negative shocks, especially in the upper regime. A positive relationship between inflation and exchange rate pass-through exists. During high inflation periods, pass-through to domestic prices increases.

Analysis of exchange rates in the economic uncertainty era

“…A study by Türel & Orhan (2022) found that inflation positively contributes to the currency, but interest rates negatively affect the currency. This finding contradicts research conducted by Alawiyah et al (2019) and Algifari & Rohman (2022) which shows that interest rates have a significant and beneficial influence on foreign exchange rates, while inflation has a negligible negative impact.…”