A Time-Varying VAR Investigation of the Relationship Among Electricity Fossil Fuel Prices and Exchange Rate in Turkey

Abstract

This paper aims to analyze the time-varying relationship among electricity, fossil fuel prices and exchange rate in Turkey based on quarterly data for the period 1988Q1 and 2016Q1. The time-varying responses imply that impact of fossil fuel prices and exchange rate on the electricity prices differs substantially over time. Electricity prices are significantly affected by the change in exchange rate and natural gas and coal prices, however the explanatory power of oil prices in general is found to be low and insignificant. The results also indicate that electricity prices have been largely dominated by the fluctuations in the natural gas prices due to the increasing share of natural gas in the production.

Keywords: Electricity price, Fossil fuel prices, TVP-VAR model, Turkey

JEL Classification: Q40, Q41