Volume 24, Issue 1 (2024)
QJER 2024, 24(1): 89-118 |
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Asgharpur H, Hatamrad S, mousavipour Z, Heydari M, Haghighat J. Estimating the role of the exchange rate channel in influencing the volume of foreign trade on Iran's economic growth and inflation.. QJER 2024; 24 (1) : 4
URL: http://ecor.modares.ac.ir/article-18-68709-en.html
URL: http://ecor.modares.ac.ir/article-18-68709-en.html
1- Professor of Economics, Faculty of Economics and Management، University of Tabriz, Tabriz, Iran
2- Ph.D. candidate in Financial Economics, University of Tabriz, Tabriz, Iran
3- Ph.D. candidate in Monetary Economics, University of Tabriz,Tabriz, Iran
4- Professor of Economics, University of Tabriz,Tabriz, Iran , jhaghighat79@gmail.com
2- Ph.D. candidate in Financial Economics, University of Tabriz, Tabriz, Iran
3- Ph.D. candidate in Monetary Economics, University of Tabriz,Tabriz, Iran
4- Professor of Economics, University of Tabriz,Tabriz, Iran , jhaghighat79@gmail.com
Abstract: (1108 Views)
Introduction
Iran's economy as an oil exporting country is highly dependent on intermediate and imported products. The volume of foreign trade plays a significant role in changes in economic growth and inflation rate. The trend of trade volume in Iran's economy indicates that various shocks have always been imposed on the economy. These shocks are significant from two perspectives. The first is that the size of the trade shocks was not the same, for example, in some cases, a positive shock was imposed on the economy due to the increase in oil revenues, while at other times, Iran's economy has experienced a negative shock due to various sanctions. The second important matter is that the intensity of trade shocks has been different in different time periods. Meanwhile, oil revenues have recorded significant figures between 2005 and 2013, but Iran has experienced a negative shock due to economic sanctions. Macroeconomics literature has indicated that the way of determining the exchange rate has an undeniable effect on the economy. The most important feature of the exchange rate in relation to trade openness and macroeconomic variables is the management of external shocks. Absorption of external shocks of flexible exchange regimes means that, when the real exchange rate or relative prices change with the external shock, automatic changes in the nominal exchange rate and flexible regimes make the necessary changes in the real exchange rate. Therefore, the effects of external shocks caused by the high volume of foreign trade can be reduced by a flexible exchange regime. In the system of flexible regimes, the negative shock causes the domestic demand and the sales of companies to decrease due to the increase in the exchange rate. In an open economy with a large number of producers, competitiveness increases and leads to the approximate compensation of the effect of the decrease in the domestic demand of the country. Therefore, in an open economy, flexible regimes absorb more shocks than fixed regimes. Conversely, in a closed economy where non-tradable goods dominate, fixed exchange rate regimes are better. Because they don't pay real depreciation rent. These concepts show that in relatively open countries, flexible regimes work better as a shock absorber and lead to better economic stability, and when the degree of trade volume is small, a fixed exchange regime leads to greater financial and economic stability. This study deals with the importance of the exchange rate channel in influencing the volume of foreign trade on Iran's economic growth and inflation.
Methodology
Iran's political and economic conditions have led to the imposition of several structural failures on the country's economy, and failure to pay attention to these conditions can lead to incorrect conclusions about Iran's economic facts. Therefore, due to changes in conditions, structural failures and cyclical changes in time series, it is better to use a model that can take these facts into account. TVP model can provide an estimate for each year by identifying the conditions of each period. The obtained coefficient, while specifying the positive and negative effects of the explanatory parameters on the dependent variable, also shows the intensity of the coefficients.
Results and Discussion
In this research, the role of exchange rate changes in influencing the volume of foreign trade on Iran's economic growth and inflation has been investigated. A TVP-VAR time series model is estimated for the period 1972-2021. The results show that with an increase in the volume of trade, if the exchange rate increases, the economic growth increases and the inflation rate decreases.
While with the increase in the volume of trade, if the suppression of the exchange rate is on the agenda, the inflation will increase sharply and the economic growth will decrease
Conclusion
According to the inverse effect of trade on inflation and the direct relationship between the exchange rate and inflation, it is recommended to expand the volume of foreign trade and control the exchange rate in order to curb the inflation rate. Also, with the knowledge of the positive role of the managed floating exchange regime in influencing trade on economic growth and the negative role of the suppressed exchange regime in influencing it, it is recommended to avoid the fixed exchange regime as much as possible.
Iran's economy as an oil exporting country is highly dependent on intermediate and imported products. The volume of foreign trade plays a significant role in changes in economic growth and inflation rate. The trend of trade volume in Iran's economy indicates that various shocks have always been imposed on the economy. These shocks are significant from two perspectives. The first is that the size of the trade shocks was not the same, for example, in some cases, a positive shock was imposed on the economy due to the increase in oil revenues, while at other times, Iran's economy has experienced a negative shock due to various sanctions. The second important matter is that the intensity of trade shocks has been different in different time periods. Meanwhile, oil revenues have recorded significant figures between 2005 and 2013, but Iran has experienced a negative shock due to economic sanctions. Macroeconomics literature has indicated that the way of determining the exchange rate has an undeniable effect on the economy. The most important feature of the exchange rate in relation to trade openness and macroeconomic variables is the management of external shocks. Absorption of external shocks of flexible exchange regimes means that, when the real exchange rate or relative prices change with the external shock, automatic changes in the nominal exchange rate and flexible regimes make the necessary changes in the real exchange rate. Therefore, the effects of external shocks caused by the high volume of foreign trade can be reduced by a flexible exchange regime. In the system of flexible regimes, the negative shock causes the domestic demand and the sales of companies to decrease due to the increase in the exchange rate. In an open economy with a large number of producers, competitiveness increases and leads to the approximate compensation of the effect of the decrease in the domestic demand of the country. Therefore, in an open economy, flexible regimes absorb more shocks than fixed regimes. Conversely, in a closed economy where non-tradable goods dominate, fixed exchange rate regimes are better. Because they don't pay real depreciation rent. These concepts show that in relatively open countries, flexible regimes work better as a shock absorber and lead to better economic stability, and when the degree of trade volume is small, a fixed exchange regime leads to greater financial and economic stability. This study deals with the importance of the exchange rate channel in influencing the volume of foreign trade on Iran's economic growth and inflation.
Methodology
Iran's political and economic conditions have led to the imposition of several structural failures on the country's economy, and failure to pay attention to these conditions can lead to incorrect conclusions about Iran's economic facts. Therefore, due to changes in conditions, structural failures and cyclical changes in time series, it is better to use a model that can take these facts into account. TVP model can provide an estimate for each year by identifying the conditions of each period. The obtained coefficient, while specifying the positive and negative effects of the explanatory parameters on the dependent variable, also shows the intensity of the coefficients.
Results and Discussion
In this research, the role of exchange rate changes in influencing the volume of foreign trade on Iran's economic growth and inflation has been investigated. A TVP-VAR time series model is estimated for the period 1972-2021. The results show that with an increase in the volume of trade, if the exchange rate increases, the economic growth increases and the inflation rate decreases.
While with the increase in the volume of trade, if the suppression of the exchange rate is on the agenda, the inflation will increase sharply and the economic growth will decrease
Conclusion
According to the inverse effect of trade on inflation and the direct relationship between the exchange rate and inflation, it is recommended to expand the volume of foreign trade and control the exchange rate in order to curb the inflation rate. Also, with the knowledge of the positive role of the managed floating exchange regime in influencing trade on economic growth and the negative role of the suppressed exchange regime in influencing it, it is recommended to avoid the fixed exchange regime as much as possible.
Article number: 4
Article Type: Original Research |
Subject:
Macroeconomics and Monetary Economics
Received: 2023/04/25 | Accepted: 2023/05/14 | Published: 2024/03/18
Received: 2023/04/25 | Accepted: 2023/05/14 | Published: 2024/03/18
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