Asymmetric effects of diesel prices and exchange rates on turkey's food prices

Abstract

This study analyses the asymmetric effects of the swings in diesel prices and exchange rates on Turkey’s food prices with the Non-Linear Autoregressive Distributed Lag (NARDL) model. For this purpose, Turkey’s diesel prices, exchange rate, and general food price index data for the same period between January 2000 and December 2019 were adopted. Considering that diesel prices are an essential cost item in agricultural production, it becomes crucial to determine the effect on food prices. Besides, the exchange rate fluctuations are expressed as another important macro variable that impacts food prices. As a result of the NARDL model, asymmetric co-integration between the general food price index, diesel prices, and the exchange rate was determined. Still, it has been observed that the negative and positive changes in diesel prices on food prices, in the long run, do not have a significant effect. On the other hand, the negative effect of the exchange rate was significant. It is concluded that a 1% decrease in the negative changes in the exchange rate will cause 0.94% decrease in food prices. Consequently, the general food price is affected by adverse shocks on the exchange rate in the long run. One may be concluded that the exchange rate should be considered while formulating policies about the swings in food prices. Especially, the local production of agricultural inputs affected by exchange rate fluctuations could be encouraged.