Pass-through of oil prices to domestic prices: Evidence from an oil-hungry but oil-poor emerging market

This paper aims to investigate the changes in the impact of world oil prices on consumer and producer prices in Turkey, an import dependent country in terms of crude oil and oil petroleum products. According to many researchers, the oil price pass-through to domestic prices has been decreasing recently. We estimate a recursive VAR model on rolling windows to evaluate the changes in the pass-through of oil prices to domestic prices. For the period 1990-2012, we identify an increasing trend in the pass-through of oil prices to domestic prices in Turkey. The increasing pass-through may be attributed to the changes in relative prices: As oil becomes more important in the overall cost structure, firms become more responsive to its price. The results also suggest that the impact of oil prices on producer prices is almost two times higher than the impact on consumer prices. Moreover, the gap between the oil price pass-through to producer prices and the pass-through to consumer prices increased during this period.