Monetary policy surprises and exchange rate pass-through: evidence from Türkiye

This paper provides evidence of how positive and negative monetary policy surprises affect exchange rate pass-through (ERPT) for the CPI inflation rate and its 12 subcomponents by using the state space model with monthly data from January 2013 to December 2023 for Türkiye. The empirical findings from the CPI inflation rate and its subcomponents show that a looser-than-expected monetary policy affects ERPT more than a tighter-than-expected monetary policy. The impacts of the increases in positive monetary policy surprises on ERPT are highest in Transport; Furnishing, Household Equip. & etc.; Food and Non-Alcoholic Beverages; Education; and Clothing and Footwear sectors, which are more dependent on imported inputs and thus more sensitive to exchange rate movements. The impacts of the increases in the negative monetary policy surprises on ERPT are highest in Transport; Health; Furnishing, Household Equip. & etc.; Miscellaneous Goods and Services; Hotels, Cafes and Restaurants; and Food and Non-Alcoholic Beverages. Consequently, these findings demonstrate the benefits of a positive monetary policy surprise to struggle inflation problem by reducing the ERPT. Within this framework, the implementation of front-loaded, i.e. proactive interest rate decisions, may be put forward as a policy recommendation for the success of controlling inflation.