TIME-VARYING EXCHANGE RATE PASS-THROUGH IN TURKEY: A DCC GARCH ANALYSIS
Özet
Ensuring price stability is one of the basic conditions for the effectiveness of a market
economy and changes in the overall level of prices affect the economy through different
channels. The exchange rate is also one of the most important factors affecting domestic
prices and causes inflation. The concept known as Exchange Rate Pass-through (ERPT)
is defined in the economic literature as the reflection of changes in exchange rates on
domestic prices by affecting import and export prices. Especially in countries that are
open and aim to implement inflation targeting policy, the ERPT level is one of the most
important phenomena that should be considered by decision-makers. Many studies in
the literature examine this topic empirically and recently some studies have also focused
on the time-varying nature of ERPT.The arguments of the relevant studies are that the
monetary positions of the economies that is, inflation, are not constant, thus the level of
ERPT can also change over time.
The main aim of this thesis is to analyze the changing nature of ERPTover time for the
Turkish economy, which applies inflation targeting policy. For this purpose, the
dynamic conditional correlation DCC-GARCH method was used with monthly data in
the periods 1990:3 and 2019:12. According to the results of the model forecast, it was
observed that the level of ERPT was high in the 1990s when high inflation was
observed in Turkey, and in the last decade, it remained lower with relatively low
inflation rates. The results obtained in this context support Taylor (2000)‟s hypothesis
and show that the level of ERPT varies over time.
