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The Effects of Exchange Rate Volatility on Economic Growth in Iran

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  • Sanginabadi, Bahram
  • Heidari, Hassan

Abstract

This paper investigates the effects of exchange rate volatilities on economic growth of Iran over the flexible exchange rate regime period (1988:Q1 2007:Q4). We use generalized autoregressive conditional heteroscedasticity (GARCH) family models to generate time varying conditional variance of exchange rate as a standard measure of exchange rate volatility. We also use the autoregressive distributed lag (ARDL) bounds test approach to level relationship as proposed by Pesaran et al. (2001). Our results show a significant relationship between Iranian growth volume and real exchange rate volatility. The long run results of ARDL model show that the effect of exchange rate volatility on economic growth is negative. ECM estimate shows that approximately 22% of disequilibria from the previous period's shocks converge back to the long run equilibrium in the current period.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 52406.

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Date of creation: Jun 2012
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Publication status: Published in Actual Problems of Economics 6.132(2012): pp. 430-441
Handle: RePEc:pra:mprapa:52406

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Keywords: exchange rate volatility; economic growth; bounds test; Iran.;

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  1. 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., John Wiley & Sons, Ltd., vol. 16(3), pages 289-326.
  2. Paresh Kumar Narayan, 2005. "The saving and investment nexus for China: evidence from cointegration tests," Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 37(17), pages 1979-1990.
  3. Sebastian Edwards & Eduardo Levy Yeyati, 2003. "Flexible Exchange Rates as Shock Absorbers," NBER Working Papers 9867, National Bureau of Economic Research, Inc.
  4. Arratibel, Olga & Furceri, Davide & Martin, Reiner & Zdzienicka, Aleksandra, 2011. "The effect of nominal exchange rate volatility on real macroeconomic performance in the CEE countries," Economic Systems, Elsevier, vol. 35(2), pages 261-277, June.
  5. Philippe Aghion & Philippe Bacchetta & Romain Ranciere & Kenneth Rogoff, 2006. "Exchange Rate Volatility and Productivity Growth: The Role of Financial Development," Working Papers 06.02, Swiss National Bank, Study Center Gerzensee.
  6. Bagella, Michele & Becchetti, Leonardo & Hasan, Iftekhar, 2004. "The anticipated and concurring effects of the EMU: exchange rate volatility, institutions and growth," Journal of International Money and Finance, Elsevier, Elsevier, vol. 23(7-8), pages 1053-1080.
  7. Perron, Pierre, 1989. "The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis," Econometrica, Econometric Society, Econometric Society, vol. 57(6), pages 1361-1401, November.
  8. Stephen Leybourne & Paul Newbold, 2003. "Spurious rejections by cointegration tests induced by structural breaks," Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 35(9), pages 1117-1121.
  9. Marianne Baxter & Alan C. Stockman, 1988. "Business Cycles and the Exchange Rate System: Some International Evidence," NBER Working Papers 2689, National Bureau of Economic Research, Inc.
  10. Maurice Obstfeld & Kenneth Rogoff, 1995. "The Mirage of Fixed Exchange Rates," NBER Working Papers 5191, National Bureau of Economic Research, Inc.
  11. Zivot, Eric & Andrews, Donald W K, 1992. "Further Evidence on the Great Crash, the Oil-Price Shock, and the Unit-Root Hypothesis," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 10(3), pages 251-70, July.
  12. Magda Kandil, 2004. "Exchange Rate Fluctuations And Economic Activity In Developing Countries: Theory And Evidence," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, Chung-Ang Unviersity, Department of Economics, vol. 29(1), pages 85-108, June.
  13. Salih Katircioglu, 2009. "Tourism, trade and growth: the case of Cyprus," Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 41(21), pages 2741-2750.
  14. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, Econometric Society, vol. 49(4), pages 1057-72, June.
  15. Aliyu, Shehu Usman Rano, 2009. "Impact of Oil Price Shock and Exchange Rate Volatility on Economic Growth in Nigeria: An Empirical Investigation," MPRA Paper 16319, University Library of Munich, Germany, revised 10 Jun 2009.
  16. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, Econometric Society, vol. 55(2), pages 251-76, March.
  17. Pahlavani, Mosayeb & Wilson, Ed & Valadkhani, Abbas, 2005. "Structural Changes in the Iranian Economy: An Empirical Analysis with Endogenously Determined Breaks," Economics Working Papers, School of Economics, University of Wollongong, NSW, Australia wp05-05, School of Economics, University of Wollongong, NSW, Australia.
  18. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
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