Fuel prices, exchange rate pass-through, fiscal dynamics, and inflation in Türkiye: an ARDL analysis for the post-pandemic period

Abstract

Persistent high inflation has become one of the central macroeconomic challenges in Türkiye over the past decade, with increasing complexity arising from fluctuations in fuel prices, exchange-rate volatility, and expansive public spending. Although these factors have drawn considerable attention—particularly in the aftermath of the COVID-19 pandemic—the number of empirical studies that jointly examine their long- and short-run impacts remains limited. Addressing this gap, the present study investigates the key macroeconomic determinants of Türkiye’s inflation dynamics, focusing on fuel prices, the exchange rate, and public expenditures. The primary objective is to disentangle long-run structural drivers from short-run cost-push pressures, thereby providing a clearer understanding of the mechanisms through which inflation operates. Using monthly data for 2014:03–2024:10, all variables are log-transformed and analyzed within an Autoregressive Distributed Lag (ARDL) framework. The bounds test confirms a strong long-run cointegration relationship among the variables. Long-run estimates show that public expenditures exert a persistent and statistically significant upward pressure on the price level, whereas gasoline and diesel prices do not display significant long-run effects. The exchange rate has a positive yet modest long-run impact, and neither the pandemic dummy nor its interaction terms are statistically meaningful. In the short run, both fuel prices and the exchange rate generate pronounced cost-push effects, with the lagged exchange-rate pass-through being particularly strong. The findings indicate that inflation in Türkiye functions through a dual mechanism: heightened sensitivity to external cost shocks in the short term and demand-side pressures driven by fiscal expansion in the long term. These results underscore the importance of exchange-rate stabilization, fiscal discipline, predictable energy-pricing frameworks, and strengthened expectation management for durable price stability.