Global Financial Conditions, Exchange-Rate Pressure, and Inflation Dynamics in Türkiye

This paper examines how global financial conditions affect domestic inflation in Türkiye and whether exchange-rate pressure constitutes an important transmission channel. Using monthly data from January 2010 to December 2024, the analysis combines a transparent measure of exchange-rate pressure with a parsimonious global financial conditions index constructed from the federal funds rate, the broad nominal U.S. dollar index, and the BAA minus federal funds spread. The empirical framework relies on dynamic single-country time-series models for headline and core inflation, estimated with month-of-year fixed effects and Newey-West heteroskedasticity- and autocorrelation-consistent standard errors. The results show that inflation in Türkiye is strongly persistent and that exchange-rate pressure has a positive and economically meaningful effect on both headline and core inflation. Tighter global financial conditions are also positively associated with domestic inflation, with the relationship appearing more clearly in the core inflation equation. An auxiliary exchange-rate-pressure equation indicates that external financial tightening is linked to foreign-exchange stress, while comparison models excluding exchange-rate pressure show a larger cumulative role for global financial conditions. Taken together, these findings are consistent with the view that foreign-exchange pressure absorbs part of the association between external tightening and domestic prices. The paper contributes by highlighting the macro-financial dimension of inflation dynamics in Türkiye within a transparent and replicable monthly framework based entirely on publicly accessible data. The findings imply that inflation vulnerability in Türkiye cannot be assessed adequately without accounting for the interaction between the global financial environment and the exchange-rate channel.