Exchange Rate Pass-Through to Consumer Prices in Turkey: Nonparametric Kernel Estimation Evidence

Yilmaz, Nejat and Yucel, Eray (2021): Exchange Rate Pass-Through to Consumer Prices in Turkey: Nonparametric Kernel Estimation Evidence.

Abstract

Exchange rate pass-through (ERPT) in the Turkish economy appeared again, especially after mid-2018 when policies to re-balance and soft-land the economy failed to a wide extent. Such re-appearance of the feedback from exchange rates to domestic prices deserves investigative efforts, having recalled that part of the stabilization success of the Central Bank of Turkey in early 2000s directly stemmed from its ability to reduce ERPT. In this paper, we aim to contribute to current policy discussions on Turkey by presenting our nonparametric kernel-based density function and regression estimates of the pass-through effect. Our findings are indicative not only of a sizable level of ERPT but also of its dependence on the size of currency depreciation.

• Item Type: MPRA Paper
• Language: English
• Keywords: Exchange Rate; Currency Depreciation; Pass-through to Inflation; Consumer Prices; Monetary Policy; Inflation Targeting; Central Bank Performance
• Subjects: C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C51 - Model Construction and Estimation; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies

References

Beldi, L., Djelassi, M., & Kadria, M. (2017). Revisiting the Exchange Rate Pass-through in Emerging Markets. University Library of Munich, Germany.

Caselli, G. F., & Roitman, A. (2016). Non-Linear Exchange Rate Pass-Through in Emerging Markets. International Monetary Fund.

Çiftçi, M., & Yılmaz, M. H. (2018). Nonlinear Dynamics in Exchange Rate Pass-Through and Inflation Persistence: The Case of Turkish Economy. Asian Journal of Economic Modelling, 6(1), 8-20.

Goldberg, P. K., & Knetter, M. M. (1996). Goods Prices and Exchange Rates: What Have We Learned? (No. w5862). National Bureau of Economic Research.

Ha, J., Stocker, M., & Yilmazkuday, H. (2019). Inflation and Exchange Rate Pass-Through. The World Bank.

Hardle, W. (1990). Applied Nonparametric Regression. Cambridge, Birleşik Krallık: Cambridge University Press.

Hardle, W., Müller, M., Sperlich, S., Werwatz, A. (2004). Nonparametric and Semiparametric Models. Berlin, ABD Virgin Adaları: Springer.

Hayfield, T. ve Racine, J.S. (2020). np: Nonparametric kernel smoothing methods for mixed datatypes. R package version 0.60-10.

Kara, H., Tuger, H. K., Ozlale, U., Tuger, B., Yavuz, D., & Yucel, E. M. (2005). Exchange Rate Pass-Through in Turkey: Has It Changed and to What Extent? (No. 0504). Research and Monetary Policy Department, Central Bank of the Republic of Turkey.

Kara, H., Küçük‐Tuğer, H., Özlale, Ü., Tuğer, B., & Yücel, E. M. (2007). Exchange Rate Regimes and Pass‐Through: Evidence from The Turkish Economy. Contemporary Economic Policy, 25(2), 206-225.

Kara, H., & Öğünç, F. (2007). Inflation Targeting and Exchange Rate Pass-Through: The Turkish Experience. Emerging Markets Finance and Trade, 44(6), 52-66.

Li, Q., & Racine, J. (2007). Nonparametric Econometrics: Theory and Practice. Princeton, Amerika Birleşik Devletleri: Princeton University Press.

Lopez-Villavicencio, A., & Mignon, V. (2016). Exchange Rate Pass-Through in Emerging Countries: Do the Inflation Environment, Monetary Policy Regime and Institutional Quality Matter? Centre d'Etudes Prospectives et d'Informations Internationales

Onel, G., & Goodwin, B. K. (2013). A Nonparametric Approach to Modeling Exchange Rate Pass-through in Basic Commodity Markets.

Patra, D. M., Khundrakpam, K. J., & John, J. (2020). Exchange Rate Pass-through in Emerging Economies. Reserve Bank of India.

Racine, J.S. and T. Hayfield (2020), ‘np’ package for R, 06 February 2020, URL https://github.com/JeffreyRacine/R-Package-np, also available in CRAN Repository.

Rosenblatt. M. (1956). Remarks on Some Nonparametric Estimates of a Density Function. The Annals of Mathematical Statistics.

Saygılı, H., & Saygılı, M. (2019). Exchange Rate Pass-Through into Industry-Specific Prices: An Analysis with Industry-Specific Exchange Rates. Macroeconomic Dynamics, 1-33.

Schimek, M. (2000). Smoothing and Regression: Approaches, Computation and Application. Kanada, Kanada: A Wiley-Interscience Publication.

Yüncüler, Ç. (2011). Pass-Through of External Factors into Price Indicators in Turkey. Central Bank Review, 11(2), 71.

Zambom, A. Z., & Dias, R. (2012). A Review of Kernel Density Estimation with Applications to Econometrics. arXiv preprint arXiv:1212.2812.