Exchange rate pass-through is a phenomenon that has policy implications in many ways.The degree and speed of ERPT play a critical role in the choice of optimal monetary policy and exchange rate regime. It is no wonder why there have been many theoretical and empirical studies conducted to understand different aspects of ERPT phenomenon. For the last two decades the literature extended to include emerging market economies as many developing countries have recently adopted flexible exchange rate regime along with inflation targeting strategy.

ERPT has been declining substantially over time and that the ERPT has a nonlinear (asymmetric) nature. The theoretical studies focusing on the measurement of ERPT degree and examining the potential reasons for a decline in ERPT put forward micro and macro-based approaches. While micro-based approach examines pricing behavior of a multinational monopolistically competitive firms (pricing to market, local currency pricing-producer currency pricing), macro-based approach discusses the issue from the endogenity perspective that is, from the effects of inflation level (monetary policy stance) and exchange rate regime on the degree of ERPT. Empirical methods employed in this literature include VAR, MS-VAR, STAR, Time Varying Parameter (TVP, Kalman Filter), and panel regression modeling techniques.

The central objectives of this project are i) to derive time-varying ERPT degree and ii) to investigate the macro determinants of ERPT.

This study involves two parts: (i) identifying the countries that have strong interdependencies to Turkish business cycle with an application of Longest Common Subsequence algorithm. This step includes the discussion about the suitability of this algorithm for business cycle transmission in the light of current studies, (ii) investigating the channes through which international business cycles are transmitted to Turkish Economy. In this step several panel estimation methods are employed to the bilateral data from sample countries. The dependent variable is the degree of transmission measured by LCS algorithm. In addition, LCS algorithm is also used as a similarity measure for some candidate determinants.

Ozkan I., L. Erden, (2012) International transmission of business cycles to Turkey, Iktisat Isletme ve Finans, 27(320), 9-34.

Erden L., I. Ozkan, (2014) Determinants of international transmission of business cycles to Turkish economy, Economic Modelling, 36, 383-390

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