The Relationship between Inflation and Exchange Rate: A Case of Turkey
Keywords:
inflation, exchange rate, cointegration analysisAbstract
Exchange rates are considered to be related to the general level of prices, due to their determinant role on expectations as well as the effect of exchange rates on the prices of imported and export goods. One of the most important effects of the exchange rate level, which has the potential to affect the economy through different channels depending on the input composition in the production function, the level of development of the financial system and the balance sheet structure of both the real and financial sector, is seen on inflation. A balanced course of inflation and exchange rate, which are the most important parameters in maintaining the macroeconomic balance in a country, are indispensable for a healthy economy and stability. The aim of this study is to determine the long- and short-term relationships between inflation and exchange rate for the monthly data for the period 2010.01-2023.02. As a result of Johansen cointegration analysis, (β=0.275, p<0.05) a positive long-term relationship was determined. As a result of the error correction model, a short-term relationship was obtained, it was determined that 42.8% of the short-term deviations between the series that followed together in the long-term disappear and the series will converge to the long-term equilibrium value again.
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