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Exchange Rate Fluctuations and Output in Oil-Producing Countries: The Case of Iran

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Author Info
Mohsen Bahmani-Oskooee
Magda E. Kandil

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Abstract

Conventional wisdom states that currency depreciation in oil-producing countries are contractionary because demand effects, limited by the prevalence of oil exports priced in dollars, are more than offset by adverse supply effects. Iran, however, has experienced a rapid increase in non-oil exports in the last decade. Against this background, the paper tests whether the conventional wisdom still applies to Iran and concludes that the emergence of the non-oil export sector has made currency depreciation expansionary. The expansionary effect is particularly evident with respect to anticipated persistent depreciation in the long-run. Notwithstanding the varying effects of exchange rate fluctuations on the demand and supply sides of the economy, managing a flexible exchange rate gradually over time towards achieving stability in the real effective exchange rate may strike the necessary balance.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 07/113.

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Length: 32 pages
Date of creation: 09 May 2007
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Handle: RePEc:imf:imfwpa:07/113

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  1. Mohsen Bahmani-Oskooee & Souphala Chomsisengphet & Magda Kandil, 2002. "Are devaluations contractionary in Asia?," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 25(1), pages 69-82, January. [Downloadable!] (restricted)
  2. Mohsen Bahmani-Oskooee & Aghdas Mirzaie, 2000. "The Long-Run Effects Of Depreciation Of The Dollar On Sectoral Output," International Economic Journal, Korean International Economic Association, vol. 14(3), pages 51-61, October. [Downloadable!] (restricted)
  3. Mohsen Bahmani-Oskooee & Zohre Ardalani, 2006. "Exchange Rate Sensitivity of U.S. Trade Flows: Evidence from Industry Data," Southern Economic Journal, Southern Economic Association, vol. 72(3), pages 542-559, January.
  4. Taye, Haile Kebret, 1999. "The Impact of Devaluation on Macroeconomic Performance: The Case of Ethiopia," Journal of Policy Modeling, Elsevier, vol. 21(4), pages 481-496, July. [Downloadable!] (restricted)
  5. M. Hashem Pesaran & Yongcheol Shin & Richard J. Smith, 2001. "Bounds testing approaches to the analysis of level relationships," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(3), pages 289-326. [Downloadable!]
  6. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March. [Downloadable!] (restricted)
  7. Rogers, John H. & Wang, Ping, 1995. "Output, inflation, and stabilization in a small open economy: Evidence from Mexico," Journal of Development Economics, Elsevier, vol. 46(2), pages 271-293, April. [Downloadable!] (restricted)
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  8. Anker, Peter & Bahmani-Oskooee, Mohsen, 2001. "On the Relationship between the Value of the Mark and German Production," Applied Economics, Taylor and Francis Journals, vol. 33(12), pages 1525-30, October. [Downloadable!] (restricted)
  9. Alexander W. Hoffmaister & Carlos A. Végh Gramont, 1995. "Disinflation and the Recession-Now-Versus-Recession-Later Hypothesis: Evidence from Uruguay," IMF Working Papers 95/99, International Monetary Fund.
  10. Bahmani-Oskooee, Mohsen & Goswami, Gour Gobinda, 2004. "Exchange rate sensitivity of Japan's bilateral trade flows," Japan and the World Economy, Elsevier, vol. 16(1), pages 1-15, January. [Downloadable!] (restricted)
  11. Kandil, Magda & Mirzaie, Aghdas, 2002. "Exchange rate fluctuations and disaggregated economic activity in the US: theory and evidence," Journal of International Money and Finance, Elsevier, vol. 21(1), pages 1-31, February. [Downloadable!] (restricted)
  12. Solimano, Andres, 1986. "Contractionary devaluation in the southern cone : The case of Chile," Journal of Development Economics, Elsevier, vol. 23(1), pages 135-151, September. [Downloadable!] (restricted)
  13. Bahmani-Oskooee, Mohsen & Ratha, Artatrana, 2008. "Exchange rate sensitivity of US bilateral trade flows," Economic Systems, Elsevier, vol. 32(2), pages 129-141, June. [Downloadable!] (restricted)
  14. Barbone, Luca & Rivera-Batiz, Francisco, 1987. "Foreign capital and the contractionary impact of currency devaluation, with an application to Jamaica," Journal of Development Economics, Elsevier, vol. 26(1), pages 1-15, June. [Downloadable!] (restricted)
  15. Krugman, Paul & Taylor, Lance, 1978. "Contractionary effects of devaluation," Journal of International Economics, Elsevier, vol. 8(3), pages 445-456, August. [Downloadable!] (restricted)
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  16. Thorvaldur Gylfason & Michael Schmid, 1983. "Does Devaluation Cause Stagflation?," Canadian Journal of Economics, Canadian Economics Association, vol. 16(4), pages 641-54, November. [Downloadable!] (restricted)
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