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Evaluation of Türkiye’s Domestic Prices and Exchange Rate Relationship with State Space Models

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  • Fikriye Ceren Bostancı

    (Kocaeli Üniversitesi, Siyasal Bilgiler Fakültesi, İktisat Bölümü, Kocaeli, Türkiye)

  • Selçuk Koç

    (Kocaeli Üniversitesi, Siyasal Bilgiler Fakültesi, İktisat Bölümü, Kocaeli, Türkiye)

Abstract

In this article, an economic analysis of Türkiye is discussed to introduce State Space Models. State Space Models offer a preferred modelling method as they have flexible structures. As an economic application of this study, an analysis is conducted with Türkiye’s monthly Consumer Price Index (CPI), USD/TRY and EUR/TRY for the period 2005-2024. In the first stage, a modelling approach with only explanatory variables is adopted. Subsequently, in addition to the models with only explanatory variables, a dummy variable was added to be valid from January 2023 onwards. Deterministic and stochastic features were considered in the analysis, and these different model structures were estimated. As a result, it is concluded that the best model structure is the Stochastic Level and Explanatory Variable-Dummy Variable model for the USD/TRY and EUR/TRY. The results show that the effects of USD/TRY and EUR/TRY on the CPI are similar and positive. However, the CPI is found to be relatively less sensitive to fluctuations in the USD/TRY and EUR/TRY. In addition, the use of a dummy variable in the model allowed the comparison of domestic prices between the two periods. Accordingly, it is inferred that domestic prices in the first month of 2023 and thereafter are lower than those in the previous periods. These findings have important implications for a better understanding of the relationship between exchange rates and domestic prices in Türkiye and contribute to the literature in terms of demonstrating the use of State Space Models in an economic application.

Suggested Citation

  • Fikriye Ceren Bostancı & Selçuk Koç, 2024. "Evaluation of Türkiye’s Domestic Prices and Exchange Rate Relationship with State Space Models," EKOIST Journal of Econometrics and Statistics, Istanbul University, Faculty of Economics, vol. 0(41), pages 161-171, December.
    • Handle: RePEc:ist:ekoist:v:0:y:2024:i:41:p:161-171
    DOI: 10.26650/ekoist.2024.41.1576282
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    References listed on IDEAS

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