Investigation of the Long and Short-Term Relationship Between Exchange Rate and Inflation in Türkiyeİbrahim Aytekin, Seda Bayrakdar, Emre Aksoy
The Covid-19 pandemic and the exchange rate shock that the Turkish economy has been subjected to have put pressure on inflation in that nation’s economy, which is reliant on imported inputs for production. Accordingly, in this study, the relationship between the monthly consumer price index, producer price index, and real effective exchange rate in Türkiye between the years 2004-2021 was examined by the time series analysis method. Augmented Dickey-Fuller and Phillips-Perron unit root tests were used to determine the stationarity levels of the data in time series analysis. According to the findings of the unit root tests, the Autoregressive Distributed Lag-Bound test was utilized to ascertain the cointegration relationship between the data. The Toda-Yamamoto causality test was employed in the analysis’ last stage to determine whether there was a statistical correlation between the data. The empirical results are that the real effective exchange rate, inflation, and producer price index are data that can affect each other in the long run in Türkiye. In the study, it has been determined that a 1% increase in the producer price index in Türkiye, in the long run, will create a 0.40% increase in inflation. In the long run, the relationship between inflation and the real effective exchange rate is statistically insignificant. The Toda-Yamamoto causality test results, on the other hand, reveal that there is a one-way causality relationship from the producer price index to inflation, but a bidirectional causality relationship between the real effective exchange rate and the producer price index.
Türkiye’de Döviz Kuru ile Enflasyon Arasındaki Uzun ve Kısa Dönemli İlişkinin İncelenmesiİbrahim Aytekin, Seda Bayrakdar, Emre Aksoy
Türkiye ekonomisinde, 2004-2021 yılları arasında aylık veriler kullanılarak tüketici fiyat endeksi, üretici fiyat endeksi ve reel efektif döviz kuru arasındaki ilişkiler ARDL sınır testi ile araştırılmıştır. Ulaşılan ampirik sonuçlar, Türkiye’de döviz kuru, enflasyon ve üretici fiyatları değişkenlerinin uzun vadede birbirlerini etkileyebilen değişkenler oldukları yönündedir. Çalışmada Türkiye’de uzun dönemde üretici fiyatlarında görülen %1’lik bir artışın enflasyonda %0.40’lık bir artış oluşturacağı tespit edilmiştir. Uzun dönemde enflasyon ile reel efektif döviz kuru arasındaki ilişki ise istatistiki açıdan anlamsızdır. Söz konusu değişkenler arasındaki nedensellik ilişkisini tespit etmek açısından uygulanan Toda-Yamamoto nedensellik testi sonuçları ise döviz kuru ile üretici fiyatları arasında çift yönlü nedensellik ilişkisinin olduğunu, fakat üretici fiyatlarından enflasyona doğru ise tek yönlü bir nedensellik ilişkisinin olduğun göstermektedir.
The aim of this study is to demonstrate the relationship between the recent inflationary environment in Türkiye with exchange rate shocks. Therefore, in the study, the relations between the consumer price index, producer price index, and real effective exchange rate were examined by the ARDL bound test and Toda-Yamamoto causality test by using the data in the monthly frequency between 2004: M1-2021: M121. It is aimed to develop a series of policy suggestions based on empirical evidence that emerged as a result of the study. The descriptive statistics of the variables were examined in the initial stage of the econometric analysis. Unit root tests were then used to determine whether the variables have unit roots and are stationary. Based on the findings obtained as a result of the unit root tests, an Autoregressive Distributed Lag (ARDL) bound test was applied to the variables with the Toda-Yamamoto causality test. As a result of the ARDL bound test, it has been found that there is a relationship between foreign exchange rates, inflation, and producer prices in Türkiye. The existence of this cointegration relationship shows that exchange rate, inflation, and producer prices variables in Türkiye are variables that can affect each other in the long term.
There are statistically significant and positive relationships between inflation and exchange rate as well as producer prices and inflation, according to short-term analyses on the ARDL bound test. In long-term analysis, a statistically significant and positive relationship between inflation and producer prices has been found in Türkiye. According to this result, a 1% increase in long-term producer prices in Türkiye shows an increase of 0.40% in inflation. In the long term, there was a statistically meaningless and negative relationship between inflation and the exchange rate. According to the Toda-Yamamoto causality test, another analysis conducted in the study, it was found that there was a bidirectional causality relationship between exchange rate and inflation and exchange rate and producer prices, and there was a unidirectional causality relationship from producer prices to inflation.
The evidence that emerged from the empirical literature screening and this article’s research, therefore, demonstrate that exchange rate shocks cause an inflationist environment. It is acknowledged that several factors could account for the permanence and magnitude of the transitional relationship between the exchange rate and inflation. These reasons are permanent the rise in the exchange rate, the rate of devotion, the degree of openness of the economy, the rate of import goods in the domestic consumption goods, the rate of export to imports, the degree of substitution of imported goods with the goods produced in the domestic, energy, intermediate and raw materials are provided from abroad and expectations related to inflation. In Türkiye, the exchange rate and inflation transition were seen on the PPI, but a significant relationship could not be determined on the CPI. The reason for this is the import composition of the Turkish economy. The weight of energy, raw materials, and intermediate goods is more significant considering the composition of imports. Therefore, the exchange rate effect on the CPI is likely to pass indirectly through PPI. In this study, the findings of the following studies are included in the literature which deals with Türkiye from inflation, producer prices, and real exchange rate: Leigh and Rossi (2002), Berument (2002), Arbatlı (2003), Bayraktutan and Aslan (2003), Gül and Ekinci (2006), Kara et al. (2007), Kara and Öğünç (2008), Peker and Görmüş (2008), Güneş (2013), Ayvaz-Güven and Uysal (2013), Sever and Mızrak (2014), Korkmaz and Bayır (2015), Bulut (2017), Bozdağlıoğlu and Yılmaz (2017), Okur (2017), Kaygısız (2018), Kaya and Soybilgen (2019), Polat (2020), Alkan and Dağıdır (2020), Kara and Sarıkaya (2021), Aytekin and Uçan (2022) and Şeker (2022) it was found that it supports the results.
The first of the policy suggestions to be made following these findings is the need to evaluate any exchange rate shock as a supportive element of export-based growth by the monetary authority. It is believed that this approach drives up PPI in Turkey, where import dependence in the process of production is well-known to be high. Therefore, it is important to create policies that stimulate and facilitate the country’s production of capital and intermediate goods. For companies that produce intermediate goods and capital goods to reduce production costs, there can be privileges such as cheaper energy, tax exceptions, and employment support. Another important issue is the dependence on external energy in energy. Reducing dependence on external energy, which is the most basic input of production, will play an active role in reducing inflation. For this, consideration should be given to domestic energy sources, particularly renewable energy sources like solar and wind energy. It will be beneficial to take measures to lower the expenses associated with such energy production.