Asymmetric Exchange Rate Pass-Through to Domestic Prices in Turkey: Evidence from a Nonlinear Autoregressive Distributed Lag (NARDL) Model

This study investigates the asymmetric exchange rate pass-through (ERPT) to domestic consumer and producer prices in Turkey using a Nonlinear Autoregressive Distributed Lag (NARDL) framework. Monthly data spanning from January 2010 to December 2023 are utilized to capture the dynamic and potentially non-linear responses of inflation to exchange rate shocks (specifically the USD/TRY exchange rate). The empirical results reveal significant long-run and short-run asymmetries in the transmission of exchange rate movements to both the Consumer Price Index (CPI) and the Producer Price Index (PPI). Specifically, positive exchange rate shocks (depreciations of the Turkish Lira) exert a substantially larger and faster impact on domestic prices compared to negative shocks (appreciations). Furthermore, the pass-through effect is found to be significantly higher for producer prices than for consumer prices, underscoring the vulnerability of the domestic production structure to imported input costs. These findings suggest that monetary policy in Turkey must account for these structural asymmetries to effectively anchor inflation expectations and stabilize domestic prices.