Suppose that a research team in CBRT studies the impact of negative FX shock on the...

 

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Suppose that a research team in CBRT studies the impact of negative FX shock on the future consumer price inflation. They prepare a presentation to warn the Monetary Policy Committee about the adverse impact of depreciating TL on producer prices and consumer prices; the following figure illustrates the cumulative impulse-response functions (IRF). Impulse response analysis trace the dynamic impact of a "shock" to a variable on other variables that are obtained via multivariate time-series methods. In simpler words, for instance, the first panel shows the evolution of the impact of an exchange rate shock (e.g. depreciation of TL against other currencies) to the producer price index for 15 months. If Turkish lira depreciates against foreign currencies with one standard deviation, it pushes the producer prices up for 2 months, the impact gets smaller over time, and contributes to the PPI by around 2% in total. The interpretation of other panels are similar, the dashed lines shows the 95% confidence interval for the impulse responses. Response of PPI to FX Shock Response of CPI to FX Shock 05 Ē 2 468 10 12 14 05 P 03 8 02 01 04 401 112 104 00 2 46 10 12 14 05 64 03 00 Response of CPI to PPI 12 14 a) Discuss the impact of exchange rate depreciation on the consumer price inflation using all three plots. Hint: Take into account the indirect effects; PPI is also affected by TL depreciation and PPI affects the CPI, too. (5 points) Suppose that a research team in CBRT studies the impact of negative FX shock on the future consumer price inflation. They prepare a presentation to warn the Monetary Policy Committee about the adverse impact of depreciating TL on producer prices and consumer prices; the following figure illustrates the cumulative impulse-response functions (IRF). Impulse response analysis trace the dynamic impact of a "shock" to a variable on other variables that are obtained via multivariate time-series methods. In simpler words, for instance, the first panel shows the evolution of the impact of an exchange rate shock (e.g. depreciation of TL against other currencies) to the producer price index for 15 months. If Turkish lira depreciates against foreign currencies with one standard deviation, it pushes the producer prices up for 2 months, the impact gets smaller over time, and contributes to the PPI by around 2% in total. The interpretation of other panels are similar, the dashed lines shows the 95% confidence interval for the impulse responses. Response of PPI to FX Shock Response of CPI to FX Shock 05 Ē 2 468 10 12 14 05 P 03 8 02 01 04 401 112 104 00 2 46 10 12 14 05 64 03 00 Response of CPI to PPI 12 14 a) Discuss the impact of exchange rate depreciation on the consumer price inflation using all three plots. Hint: Take into account the indirect effects; PPI is also affected by TL depreciation and PPI affects the CPI, too. (5 points)

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The impact of exchange rate depreciation on consumer price inflation can be seen from all three plot... View the full answer