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

Abstract

In this study, the impacts of monetary policy uncertainty (MPU) on second and third-stage ERPT in Türkiye for the period June 2010–December 2023 are examined by using the Time-Varying Parameter VAR Model with Stochastic Volatility (TVP-VAR) developed by Nakajima (2011a, b). The findings of the study show that the time-varying ERPT coefficients increase in the first four periods after the MPU shock and then tend to decrease. The second-stage ERPT coefficients are greater than the third-stage ERPT coefficients over the whole period. The time-varying ERPT coefficients have increased rapidly since 2018. The second-stage ERPT coefficients respond to MPU shocks given at the dates when the CBRT Governors are dismissed before completing their terms of office by increasing more, while the third-stage ERPT coefficients respond by increasing permanently. Based on these findings, reducing monetary policy uncertainty by increasing the predictability of monetary policy decisions is recommended to reduce the ERPT.