BU Bournemouth University Exchange Rate Pass-Through into Prices: The Turkish Experience (2006-2016) Prepared by: Isa SATIO?LU MSc International Accounting and Finance (January 2016) The Business School Bournemouth University May 22, 2017 .......
ABSTRACT IMPORT PRICE PASS-THROUGH INTO INFLATION INDICATORS IN TURKEY This thesis analyzes the pass-through of external factors into consumer and producer prices in Turkey. To this end, pricing along a distribution chain framework is utilized and it is estimated by Vector Auto Regression (VAR) based on McCharthy (2000) in a sample period of January 2006 to December 2016. In VAR model, the impulse response function is utilised for estimation of speed and magnitude of the external factors onto prices. Furthermore, to measure the importance of external factors, the variance decomposition is used. Results show that, even though, the speed of pass-through of external shocks into producer prices and consumer prices are finished up in a same time, the level of pass-though into producer prices is higher than for consumer prices. Compared with the results of previous studies, findings point out that the degree of pass-through has increased recently in Turkey. In addition, it is found that external factors, i.e. high exchange rate appreciation and tax adjustment, had significant contribution to annual consumer inflation between 2014 and 2016. However, even the contributions of external shocks are excluded; year-end inflation targets would not have been attained that the CBRT hasn't succeeded in its inflation targeting. Keywords: Inflation, Pass-through, Import Prices, VAR Analysis, Variance decomposition, Impulse response function 1 .......
List of Figures Figure 1: Monthly Exchange Rates 2006-2017 (Source: TURKSTAT) Figure 2: Multiplier Mechanism (Tunca, 2005) Figure 3: Exchange Rate Pass-Through in USD (adapted from Forbes, 2014) Figure 4: Sterling effective exchange rate and import prices of semi- and finished manufactures (Forbes, 2014) Figure 5: Panel regression estimates for pass-through for small and large exchange rate movements (Forbes, 2014) Figure 6: Research Design Onion Figure 7: Variables and Sources Figure 8: The responses of CPI to import prices (Author) Figure 9: The responses of PPI to import prices (Author) Figure 10: The responses of PPI and CPI to ER (Author) Figure 11: Monthly Exchange Rates 2014-2017 (Source: TURKSTAT) Figure 12: Inflation rates and Exchange 2006-2016 (Source: TURKSTAT) Figure 13: Import Prices 2014-2016 (Source: TURKSTAT) 2 .......