Prague Economic Papers 2022, 31(3):276-295 | DOI: 10.18267/j.pep.806

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

Meryem Türel ORCID...a, Ayhan Orhana
a Department of Economics, Kocaeli University, Kocaeli, Turkey

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.

Keywords: Exchange rate, pass-through, inflation rate, threshold VAR
JEL classification: E31, F31, F47

Received: January 29, 2022; Revised: May 2, 2022; Accepted: May 16, 2022; Published: September 22, 2022  Show citation

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Türel, M., & Orhan, A. (2022). Asymmetries in Exchange Rate Pass-through in Turkey: A Threshold VAR Analysis. Prague Economic Papers, 31(3-4), 276-295. doi: 10.18267/j.pep.806
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