The Effects of Exchange Rates on CPI and PPI

Article Information
Journal: Business and Economics Research Journal
Title of Article: The Effects of Exchange Rates on CPI and PPI
Author(s): Akin Usupbeyli, Sefer Ucak
Volume: 11
Number: 1
Year: 2020
Page: 323-334
ISSN: 2619-9491
DOI Number: 10.20409/berj.2020.252
Abstract
Strong correlation between exchange rate fluctuations and inflation rates in developing countries makes important to measure the impact of the exchange rate on domestic prices, especially for the countries applying an inflation targeting, like Turkey. Besides, in the countries having high import dependency in energy and intermediate goods, the transition of an increase in the exchange rates to domestic prices is complete. This study examines the effects of exchange rates (US Dollar) fluctuations (ER) on consumer price index (CPI) and producer price index (PPI) between 2003:01-2019:10 in Turkey. As ER series is [I(1)] and CPI and PPI series are [I(0)], ARDL model is applied. Results show that there exists a cointegration between the series and there is a bidirectional causality between CPI and ER; unidirectional relation from ER to PPI. No causality is detected from PPI to ER. When the short-run relationship between ER and CPI is examined, it was found that a depreciation in ER in Turkey causes increase in CPI. Similar results are found for the relation between ER and PPI.

Keywords: Exchange Rate, Inflation, Consumer Price Index, Pass Through, ARDL Bounds Test

JEL Classification: F10, F31, C10

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