Question

What does “exchange rate pass-through” mean? When the TL depreciates, explain how it leads to an increase in inflation and interest rates.

Answer 1

Exchange rate pass through means:

pass through:

There exists a time gap between when the products are manufactured or services are ready to be rendered and the time when they are actually exported.

There is also a timing difference when export is done and the money consideration is received against the export.

Conceptually these gaps create a pass through.

Exchange rate pass through conceptually is the response of prices of imported and exported products to the changes in exchange rates of involved currencies.

When the TL depreciates, it leads to an increase in inflation and interest rates because:

When TL depreciates, Inflation and fed funds rate are i.e, .as interest rates are reduced, more people are able to borrow more money. T

he result is that consumers have more money to spend, causing the economy to grow and inflation to increase. The opposite holds true for rising interest rates.