Inflation Targeting and Exchange Rate Pass-Through: The Turkish Experience

Hakan Kara · Fethi Öğünç

100 citations0/0 files storedEmerging Markets Finance and Trade

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Abstract

Using a vector autoregression model, we show that the pass-through from imported inflation to domestic inflation has weakened substantially and slowed after the adoption of inflation targeting in Turkey. We argue that this finding is due mainly to several features—such as enhanced credibility of the central bank, changing behavior of the exchange rate, and a shift in expectation formation—possibly acquired by the implementation of a successful inflation-targeting regime. These observations suggest that adopting an inflation-targeting regime in itself may help to reduce exchange rate pass-through.

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References

2000Low inflation, pass-through, and the pricing power of firms 2001Exchange Rate Pass-Through to Domestic Prices: Does the Inflationary Environment Matter?2007Pass-Through of Exchange Rates and Import Prices to Domestic Inflation in Some Industrialized Economies 1995EXCHANGE RATE PASS‐THROUGH 1981A Methodological Note on the Estimation of Time Series 2005Pass-Through of Exchange Rates and Import Prices to Domestic Inflation in Some Industrialised Economies 2005On Target?: The International Experience with Achieving Inflation Targets 2002Price Setting and Exchange Rate Pass-Through: Theory and Evidence

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2017Effect of credibility and exchange rate pass-through on inflation: An assessment for developing countries 2017Asymmetric exchange rate pass-through in an emerging market economy: The case of Mexico 2008Fiscal Dominance and Inflation Targeting: Lessons from Turkey 2021Drivers of Turkish Inflation 2011Can inflation targeting regimes be effective in developing countries? The Turkish experience

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