Effect of Exchange Rate Pass-through on Producer and Consumer Prices:Türkiye, Brazil, and South Africa
Ahmet Ekrem KayaThe exchange rate is one of the prominent determinants of inflation, among the macroeconomic instability indicators. It is transmitted to domestic prices via cost, expectation, and indexation channels. As such, the exchange rate affects both consumer prices and producer prices. Several countries show trend similarity in terms of weak international reserves, short-term external debt stock, and current account deficit problems that may put pressure on the exchange rate. The aim of the study is to examine whether the affinity of the indicators that will cause the exchange rate to increase creates a similarity regarding exchange rate pass-through. Thus, exchange rate pass-through, which is a strong inflation dynamic, can be evaluated comparatively. Analysis results for 1995Q1:2020Q1 using the Autoregressive Distributed Lag method show that Turkey, Brazil, and South Africa have strong exchange rate pass-through. The increase in the exchange rate causes prices to increase in the long run, with the highest increase in Brazil and the relatively least in Turkey, among the three countries. The results show that countries are similar regarding strong exchange rate pass-through but differ concerning the level of exchange rate pass-through. Granger causality is determined from the exchange rate to the Consumer Price Index in all three countries. Causality from the Consumer Price Index to the exchange rate is only seen in Türkiye and Brazil. While Granger causality from the exchange rate to the Producer Price Index is only valid for Turkey and Brazil, causality from the Producer Price Index to the exchange rate can only be determined for South Africa.
Üretici ve Tüketici Fiyatlarında Kur Geçişkenliği Etkisi: Türkiye, Brezilya ve Güney Afrika
Ahmet Ekrem KayaMakroekonomik istikrarsızlığın göstergelerinden olan enflasyonun en önemli belirleyicileri arasında döviz kuru da yer almaktadır. Döviz kurunun yurt içi fiyatlara aktarımı maliyet, beklentiler ve endeksleme kanalları üzerinden gerçekleşir. Bu kapsamda döviz kuru hem tüketici fiyatlarını hem de üretici fiyatlarını etkilemektedir. Kur üzerinde baskı oluşturabilecek zayıf uluslararası rezervler, kısa vadeli dış borç stoğu ve cari açık sorunları açısından trend benzerliği gösteren ülkelerin kur geçişkenliği açısından birbirlerine ne kadar benzediği bu çalışmanın araştırma sorusunu oluşturmaktadır. Çalışmada, döviz kurunun yükselmesine neden olacak göstergelerin benzeşiyor olmasının kur geçişkenliği açısından da benzerlik oluşturup oluşturmadığının incelenmesi amaçlanmaktadır. Böylece güçlü bir enflasyon dinamiği olan kur geçişkenliği karşılaştırmalı olarak değerlendirilebilecektir. Gecikmesi dağıtılmış otoregresif model yöntemiyle 1995Ç1:2020Ç1 dönemi için yürütülen analiz sonuçları Türkiye, Brezilya ve Güney Afrika’nın güçlü kur geçişkenliğine sahip olduğunu göstermektedir. Döviz kurundaki artış üç ülke içerisinde uzun dönemde en fazla Brezilya’da görece en az Türkiye’de fiyatların yükselmesine neden olmaktadır. Sonuçlar güçlü kur geçişkenliği açısından ülkelerin benzeştiğini, kur geçişkenliğinin düzeyi açısından ise farklılaştıklarını göstermektedir. Döviz kurundan Tüketici Fiyat Endeksi’ne üç ülkede de Granger nedenselliği tespit edilmektedir. Tüketici Fiyat Endeksi’nden döviz kuruna nedensellik ise sadece Türkiye ve Brezilya’da görülmektedir. Döviz kurundan Üretici Fiyat Endeksi’ne Granger nedensellik yalnızca Türkiye ve Brezilya için söz konusu iken Üretici Fiyat Endeksi’nden döviz kuruna nedensellik sadece Güney Afrika için tespit edilebilmektedir.
Price stability is one of the most important components of macroeconomic stability. Exchange rate volatility is also one of the factors that cause the deterioration of a country’s price stability. Increasing exchange rates will inevitably increase the cost of raw materials, intermediate goods, and capital goods. Because of the deterioration of future inflation expectations and inflation inertia issues, economic agents will be forced to accept the exchange rate as an anchor. Thus, exchange rate movements affect domestic prices through cost, expectations, and indexing behavior channels.
Low international reserve level, short-term external debt stock, and current account deficit problems are the main causes of the national currency’s depreciation. This situation, which means an increase in the exchange rate, increases the production costs indexed to foreign currency and prices of imported final consumption products (i.e., inflation). Consequently, movements in the exchange rate are transferred to domestic prices.
This study aims to examine the exchange rate pass-through degrees of Turkey, Brazil, and South Africa, which show similar trends in weak international reserves, short-term external debt stock, and current account deficit problems. In other words, the study explores whether the similarity of the indicators that will pressure the exchange rate causes the exchange rate pass-through level in these countries to be similar.
Previous studies have focused on the effect of inflation environment, exchange rate volatility, and macroeconomic conditions on exchange rate pass-through. For example, Taylor’s (2000) conclusion that low inflation environment reduces exchange rate pass-through is supported by the findings of Albuquerque and Portugal (2005), Edwards (2006), Silva and Vernengo (2008), and Junior (2010) for Brazil. Moreover, Oladipo (2017) showed that, in addition to inflation and the output gap, inflation targeting has a significant explanatory effect on the South African exchange rate. The finding that the inflation environment reduces the exchange rate pass-through is in line with the results of Kara et al. (2005) for Turkey.
Modenesi et al. (2017) argued that exchange rate pass-through has an asymmetric effect on CPI in Brazil. Meanwhile, Camara and Feijo (2017) asserted that more than 60% of industry inflation is due to changes in exchange rates. The studies conducted for South Africa reveal an asymmetric exchange rate pass-through, lower CPI pass-through than the PPI, and higher exchange rate pass-through than the oil price pass-through (Karoro et al., 2009; Ocran, 2010; Akdeniz et al., 2022). Miyajima (2019) argued that high exchange rate volatility increases core inflation, whereas Kabundi and Mlachila (2019) claimed that improving monetary policy credibility reduces exchange rate pass-through. High dollarization trends, insufficient industry competition, inflation inertia, and exchange rate anchoring are cited as reasons for exchange rate pass-through in Turkey (Leigh and Rossi, 2002). In Turkey, a strong pass-through from the exchange rate to consumer and producer prices is detected. It is concluded that the pass-through level has decreased with the adoption of the free-floating exchange rate regime and the implementation of the inflation targeting regime (Kara et al., 2007; Kara and Öğünç, 2008; Damar, 2010; Yüncüler, 2011; Çatık and Güçlü, 2012; Tümtürk, 2017).
The ARDL method is used in this study to analyze the pass-through effect from the exchange rate to domestic prices revealed by the literature for 1995Q1:2020Q1. Pesaran et al. (2001) developed an approach that allows us to investigate the cointegration relationship of series that become stationary at different levels. Furthermore, the long-term relationship between the exchange rate and the CPI & PPI indices can be analyzed. The change in CPI and PPI caused by the exchange rate movement is analyzed by establishing two separate models for each country. In addition, the Toda and Yamamoto (1995) causality test is used to examine the bidirectional Granger causality relationship between the exchange rate and the CPI and PPI indices.
The results of Turkey, Brazil, and South Africa show a cointegration relationship between the exchange rate and the CPI and PPI indices. When the long-term effects are examined, the pass-through from exchange rate to CPI and PPI is highest in Brazil, South Africa, and Turkey, respectively. Although the proximity of the parameters that may cause the exchange rate to rise indicates a similarity concerning strong exchange rate pass-through in these countries, a differentiation exists between countries concerning the degree of pass-through.
The test results of Toda and Yamamoto (1995) show a Granger causality from exchange rate to CPI in three countries and to PPI only in Türkiye and Brazil. However, Granger causality is determined from the CPI to the exchange rate in Turkey and Brazil, and from the PPI to the exchange rate in South Africa. Based on these findings, we can argue that the literature findings on the effect of inflation environment on exchange rate pass-through overlap with the findings for Turkey, Brazil, and South Africa.
