OIL PASS-THROUGH TO DOMESTIC PRICES IN TURKEY: DOES THE CHANGE IN INFLATION REGIME MATTER?

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ÇATIK A. N. , KARAÇUKA M.

EKONOMSKA ISTRAZIVANJA-ECONOMIC RESEARCH, vol.25, no.2, pp.277-295, 2012 (Journal Indexed in SSCI) identifier identifier

  • Publication Type: Article / Article
  • Volume: 25 Issue: 2
  • Publication Date: 2012
  • Doi Number: 10.1080/1331677x.2012.11517508
  • Title of Journal : EKONOMSKA ISTRAZIVANJA-ECONOMIC RESEARCH
  • Page Numbers: pp.277-295
  • Keywords: Inflation, Oil shocks, Pass-through, Regime-dependent impulse responses, MS-VAR model, CRUDE-OIL

Abstract

This paper investigates the existence of oil pass through to inflation under different inflation regimes in Turkey. In order to compare the difference between the oil pass-through effects in the low and high inflation periods we employ Markov Regime Switching Vector Autoregressive (MS-VAR) model as a non-linear estimation framework. The regime-dependent impulse responses do not indicate strong pass through from crude oil prices to inflation in both regimes. However, this channel is working through refined petroleum product prices. The results show that there is a substantial decline in pass-through from refined petroleum prices to inflation as the economy moves from high to low inflation regime. These findings support the hypothesis of Taylor (2000) suggesting that low inflationary environment leads to a low pass-through.