Investigating the impact of money growth and exchange rate shocks on inflation in Turkey: a time-varying causality analysis

This paper investigates the dynamic relationships between money supply, exchange rates, and the consumer price index in Turkey from 1960 to 2024 using time-varying Granger causality techniques, including rolling window and recursive evolving algorithms. Our analysis shows a significant structural shift following the 2001 policy reforms. Contrary to the pre-2001 era, we find a strengthened causal influence of money supply on inflation, signaling the emergence of a consistent monetarist trend under the inflation-targeting regime initiated, implicitly, in January 2002. Concurrently, we document a rising and more prolonged exchange rate pass-through effect, challenging the prevailing belief that the post-2001 floating exchange rate regime curbed transmission. This points to a potential depreciation-inflation spiral, particularly evident after 2017. Our results, robustly confirmed by a supplementary wavelet coherence analysis, underscore that inflation in Turkey is now driven by a dual-channel mechanism, with significant implications for monetary policy.