The fuel price pass-through in Turkey: The case study of motor fuel price subsidy system

Highlights: • The study uses Factor Augmented Vector Autoregression methodology. • We find that the responses of sub-indexes are heterogeneous. • The pass-through to producer prices is found to be higher than consumer prices. • The study concludes that the subsidy program is a practical tool to eliminate inflationary impacts. Numerous efforts have been devoted to discovering the impact of oil price spikes on the domestic economy since the 1970s. These studies generally concluded that oil price changes pass-through to domestic prices. However, it is a common practice to mitigate the pass-through to domestic prices and subsidize domestic fuel prices. The Turkish government enacted a motor fuel price subsidy system in May 2018, aiming to eliminate the potential adverse effects of oil price hikes. In this context, the current study analyzes the pass-through motor fuel price changes on domestic price indexes in the Turkish economy. The study employs the monthly data between 2015 and 2019 and uses Factor Augmented Vector Autoregression methodology. The study finds that the response of consumer price sub-indexes is heterogeneous and, the pass-through to producer prices is higher than consumer prices. Also, the study concludes that the subsidy program is a practical tool to eliminate the inflationary impacts of oil price changes.