Abstract:

Two main objectives are pursued in this study. The first of these is to determine the short- and long-term values of the exchange rate reflection effect with the ARDL bounds test approach during the period when the open inflation targeting regime was adopted in the Turkish economy. The second is to determine the long-term reflection effect using FMOLS, DOLS and CCR estimation methods and to determine the reliability of the results. In accordance with these purposes, the exchange rate reflection is examined with the quarterly data of inflation and nominal exchange rate for the period 2006:Q1-2022:Q3 of Turkish economy. Empirical findings show that the effect of exchange rate reflection on the short term is realized at the levels of 7% and in the long term at the levels of about 27%. It is obtained that both ARDL and FMOLS, DOLS and CCR methods show similar results in long-term estimation. This result increases the reliability of the effect obtained. The findings obtained for the Turkish economy show that the impact of exchange rate reflection is higher in the long term compared to the short term. Turkey, which has high import input rates in intermediate goods and investment goods, needs to implement policies that decouple exchange rate volatility and minimize the negative effects of the reflection effect for sustainable macroeconomic balance.

Keywords: