The Relationship Between the Health Services Price Index and The Real Effective Exchange Rate Index in Turkey: A Frequency Domain Causality Analysis

Abstract

This paper examines whether the causal relationship between the health care price index and the real exchange rate index is temporary or permanent. To do this, we first apply the Toda-Yamamoto causality test with a structural break and then continue with frequency domain causality tests based on the Toda-Yamamoto causality test with a structural break. The results of the Toda-Yamamoto causality test with a structural break indicates that there is causality running from the real exchange rate index to the health care price index. Moreover, the frequency domain causality test results based on the Toda-Yamamoto causality test with a structural break provide evidence that the real effective exchange rate causes temporarily (in the short-and medium term) to the health care price index. The effect of the real exchange rate index on the health care price index lasts between 2 months and 8.37 months. These findings imply that there is a significant exchange rate pass-through in health care inflation in the short-and medium term. Thus, the health authorities should take into account these findings when planning health care policies in Turkey, especially health care services heavily dependent on imported materials.