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Effect of Nominal Exchange Rate Volatility on Output in Iran’s Economy

Author

Listed:
  • Yavari, Kazem

    (School of Management & Economics, Tarbiat Modares University)

  • Najjarzade, Reza

    (School of Management & Economics, Tarbiat Modares University)

  • Tavakolian, Hossein

    (Economics Department, Allameh Tabataba'i University)

  • Bahador, Ali

    (School of Management & Economics, Tarbiat Modares University
    Monetary and Banking Research Institute (MBRI))

Abstract

Volatility of exchange rate while changes from time to time, is expected to affect firm level operations as well as aggregate level outcomes i.e. macroeconomic performance. This paper, investigates the effects of exchange rate volatility on aggregate production in Iran using a Structural Vector Auto Regressive model with Exogenous Variables (SVARX). The model is estimated based on macroeconomic data during 1990q2-2015q1. Impulse response functions show that realization of a positive shock to the exchange rate volatility-measured by quarterly coefficient of variation derived from daily exchange rate data set rather than common GARCH-based measures- is associated with a significant production drop. These results are robust in reference to changing output measures. We also provide some necessary sensitivity analysis to check robustness of the results with respect to recursive restrictions which are imposed to identify the structural model. After all this robustness checks the model confirmed negative effect of exchange rate volatility on output in Iran's economy. Furthermore, the results show that CPI and exchange rate will significantly increase when exchange rate volatility rises while import declines.

Suggested Citation

  • Yavari, Kazem & Najjarzade, Reza & Tavakolian, Hossein & Bahador, Ali, 2016. "Effect of Nominal Exchange Rate Volatility on Output in Iran’s Economy," Journal of Money and Economy, Monetary and Banking Research Institute, Central Bank of the Islamic Republic of Iran, vol. 11(4), pages 419-442, October.
    • Handle: RePEc:mbr:jmonec:v:11:y:2016:i:4:p:419-442
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    More about this item

    Keywords

    Exchange Rate; Exchange Rate Volatility; Production;
    All these keywords.

    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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