Aim and Introduction

The international exchanges of business cycles influence the domestic economy through channels. Such exchanges can arise from global shocks (e.g., in oil prices), unobserved global factors (e.g. technological advancement or regional political development), or even national shocks in a particular country. To understand the impacts of such shocks on domestic economy, it is required to model the economy in the form of a global model. The global modeling of countries and the study of the relative importance of different movement sources of macroeconomic variables in the global economy to understand the impacts of global shocks on the domestic economy of Iran have been overlooked. However, a number of studies investigated shocks in oil prices by assuming interrelations of countries, no study has been conducted on the impacts of oil price shocks on the economy of Iran by assuming interrelations of Iran with its business partners. Although, a large number of studies have explored the impacts of oil price shocks , however, the impacts of the prices of other commodities on the economy in Iran or other countries have not been studied. Therefore, the aim is to investigate the effects of global changes on Iran's macroeconomic changes, including the real exchange rate, inflation, interest rate and real production.

Methodology

The present work employed the seasonal data of Iran and its business partners, including China, India, Russia, EU (i.e. Austria, Finland, France, Germany, Italy, Spain, and the Netherlands), Turkey, and South Korea from 2001 to 2022. The variables were selected based on model of Pesaran et al. (2004). The internal variables of the present study included the real production , inflation , short-term interest rate , and real currency exchange rate . The weight matrix was obtained by using the separate exports and imports of the countries for 2001-2022, calculating the external variables. The relative contributions of the countries to the economy of Iran were obtained using the channel of the business sector of the economy. The weight matrixes of the countries were calculated based on the GVAR model by using the ratio of the total of each country’s exports and imports from Iran to the total of Iran’s exports and imports to introduce the relative contributions of the countries to Iranian business into the model. The global variables of the present study included global commodity price shocks, including the logarithmic prices of oil, metals, and agricultural raw materials. The data were collected from the International Monetary Fund and the Central Bank of the Islamic Republic of Iran.

Findings

All three global prices have positive effects on the real currency exchange rate; however, the effects of oil prices are more significant, and those of basic metal prices are less significant. The positive shock effects of agricultural raw material prices on the currency exchange rate of Iran are not significant. Finally, the interest rate in Iran has positive and significant impulse responses to shocks in the prices of basic metals and agricultural raw materials and negative impulse responses to the price shocks of oil. That is, the government adopts an expansionary monetary policy (i.e. reducing the interest rate) in response to rising basic metal and agricultural raw material prices and a restrictive monetary policy (i.e. increasing the interest rate) in response to rises in the oil prices.

Discussion and Conclusion

Concerning the effects of increased global prices on the internal macroeconomic variables, it can be said that such price rises could increase the final cost of domestic products and raise inflation through the cost pressure channel if these commodities are seen as internal consuming items for production. This is reflected in the form of the positive impacts of global prices on internal inflation in the impulse response functions. However, these effects can be investigated from the demand perspective. Since Iran exports oil, basic metals, and agricultural raw materials, a rise in the global prices of these commodities raises the foreign revenues of Iran. As Iran has a relatively constant currency exchange structure, the foreign currency resources of Iran in the Central Bank rise, increasing liquidity and inflation. In such a case, the Central Bank reduces the currency exchange rate (i.e. the expansionary monetary policy) due to increased revenues of basic metal and agricultural raw material prices to support the domestic production of these commodities. This policy has increased the inflationary impacts of the prices of basic metals and agricultural raw materials within Iran. While oil revenues rise, the expansionary monetary policy is adopted to alleviate the initial inflationary effects. As a result, the initial positive effects of increased oil prices on inflation and domestic real production become insignificant. From this perspective, the Central Bank of the Islamic Republic of Iran does not adopt the same policy in response to increased revenues arising from increased global commodity prices. It can be said that the Central Bank of Iran adopts an inflation control policy for increased revenues of oil exports and an economic growth enhancement policy in response to the increased revenues of exporting basic metals and agricultural raw materials and increased real production in China. These policies can be explained by the relatively exogenous revenues of oil exports since oil revenues are not endogenous incomes arising from production structures in the economy. Moreover, since oil revenues are higher than other revenue sources, the inflationary effects of oil could be stronger. As a result, the Central Bank would have to adopt an inflation control policy. When global commodity prices and foreign currency revenues rise (which reduces the currency exchange rate in a floating exchange system) and induce inflation, the real exchange rate is expected to reduce. The results, however, revealed increased real exchange rate and, therefore, increased nominal currency exchange rate due to the Iran Parliament’s Managed Floating Currency Exchange Act of 2003. This act was in fact passed to avoid Dutch disease with the Iranian economy. According to the act, the currency exchange rate should be increased by the external-internal inflation difference every year. As a result, due to the inflationary effects of increased global prices and the policy structure of the Central Bank, increased foreign currency revenues and inflation weaken the Iranian currency and raise the real currency exchange rate