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Dr Soheil Roudari, Dr Hamidreza Maghsoudi, Dr Farzaneh Ahmadian-Yazdi,
Volume 0, Issue 0 (12-2024)
Volume 0, Issue 0 (12-2024)
Abstract
Aim and Introduction
One of the most important issues in Iran's economy is related to managing the exchange rate, inflation and budget deficit. During tightening of the sanctions, the oil revenues are limited which potentially leads to an increase in the budget deficit as well as a decrease in the currency supply which accelerates the exchange rate. On the other hand, with the increase in the budget deficit, the probability of borrowing from the banking system and also the issuance of bonds increases, which in turn rise the monetary base and liquidity. In addition, inflationary expectations also increase, which can be effective in improving assets prices. With an increase in inflation, based on the inflation-currency spiral, there is a possibility of a grow in exchange rate in order to maintain the competitiveness of domestic production. This can accelerate the price of imported commodities and cause domestic inflation again. With the increase in inflation and households spending, nominal wages will have a higher growth compared to normal conditions in order to maintain minimum purchasing power, which can again face the government with limited resources and more borrowing to meet current expenses. From the monetarists’ point of view and the classical economics, in general, the main stimulator in increasing inflation is the growth of money and liquidity. However, from the post-Keynesian economists’ point of view, inflation increases the demand of money and subsequently liquidity. On the other hand, with an increase in the exchange rate, the government's expenses usually increase more than its income, which can lead to an increase in the government's budget deficit. Also, considering the existence of a monopoly in currency supply by the central bank, the hypothesis of using currency exchange revenues (the difference between free and budget-approved currency) will be applicable and this issue can raise the impact of the budget deficit on the exchange rate. Therefore, there has always been a serious challenge among economists as well as macroeconomic decision-makers about the connectedness between macroeconomic variables. What is the main driver of the network between macro variables? Is there a different way of communication in different thresholds of their growth rate? These cases show that it is very important to examine the time-varying interrelationships between these macroeconomic variables.
Accordingly, there is a complex connection between exchange rate, inflation, budget deficit and liquidity, which can be varied in different years. Therefore, in this research, using the TVP-TVAR technique, the time-varying connectedness across exchange rate, inflation, budget deficit and liquidity is examined during March, 2006 to August, 2023.
Methodology
In the current research, the relationship between exchange rate fluctuations, inflation, government budget deficit and liquidity based on monthly data using the TVP-TVAR technique is investigated. It should be noted that all the required information is extracted from the economic indicators of the central bank, and the government's budget deficit data from 2017 onward are extracted from Iran's Program and Budget Organization.
Findings
The results show that exchange rate and liquidity are, respectively, the largest net transmitter of volatilities in the network. Moreover, inflation rate and government budget deficit, respectively, are the largest net receivers of shocks from network. On average, the TCI is 23%, and more than 70% of this interrelationship between variables is explained by other factors such as political ones. Moreover, if the variables underestimated grow up to 36% annually (3% monthly), the connection between them will be cut off. In the conditions of decreasing the growth rate of variables up to -3% per month, the exchange rate has played a dominant role and its volatilities are transferred more strongly to inflation rate and less strongly to the budget deficit and liquidity.
If the growth rate of the variables is up to 24% annually (threshold of +2% monthly growth rate), the exchange rate volatilities are transferred to inflation and no interconnectedness between other variables is observed.
Discussion and Conclusion
Our results show that, on average, the total connectedness index from 2012 to 2016 has been upward, which is caused by the tightening of sanctions and the increase in inflationary expectations, psychological factors and emotions. Moreover, the connectedness between them is increased in 2018 and 2019, which is related to the intensification of sanctions and the reduction of currency supply and the increase in inflation and budget deficit and subsequently the increase in the issuance of debt securities in the capital market in order to manage the budget deficit and as a result increase liquidity. The results show that exchange rate is a main net transmitter of volatilities in most years and the inflation rate is a main net receiver of volatilities in many years. From 2016 onwards, the budget deficit is the net receiver of shocks from network in most periods, except for one period in 2019. It is interesting to note that in 2019, with the increase in the budget deficit and the issuance of debt securities, the budget deficit is transmitter, liquidity is receiver and inflation is more receiver variable than liquidity in the network. Totally, the results show that exchange rate is the major net transmitter of shocks to other macro variables.
Moreover, based on the results of the sensitivity analysis and thresholds effect, if the growth rate of variables is up to 24% annually (threshold of +2% monthly growth rate), the exchange rate fluctuations will be transferred to inflation and no connection between other components is observed. This shows that the macroeconomic management of the economy is very sensitive to the growth rate of the thresholds of the macroeconomic components, and before the political economy and also the factors of expectations and emotions dominated the economy, the macroeconomic management, especially the exchange rate, is required. Otherwise, it is impossible to manage the investigated variables with monetary and fiscal policies. Therefore, the managed floating exchange rate should be taken into consideration and if the goal is to manage the network using macroeconomic theories, the variables should not be allowed to increase by more than 24% annual growth. Other factors such as the political economy, and especially inflationary expectations will get the dominant role in the economy
One of the most important issues in Iran's economy is related to managing the exchange rate, inflation and budget deficit. During tightening of the sanctions, the oil revenues are limited which potentially leads to an increase in the budget deficit as well as a decrease in the currency supply which accelerates the exchange rate. On the other hand, with the increase in the budget deficit, the probability of borrowing from the banking system and also the issuance of bonds increases, which in turn rise the monetary base and liquidity. In addition, inflationary expectations also increase, which can be effective in improving assets prices. With an increase in inflation, based on the inflation-currency spiral, there is a possibility of a grow in exchange rate in order to maintain the competitiveness of domestic production. This can accelerate the price of imported commodities and cause domestic inflation again. With the increase in inflation and households spending, nominal wages will have a higher growth compared to normal conditions in order to maintain minimum purchasing power, which can again face the government with limited resources and more borrowing to meet current expenses. From the monetarists’ point of view and the classical economics, in general, the main stimulator in increasing inflation is the growth of money and liquidity. However, from the post-Keynesian economists’ point of view, inflation increases the demand of money and subsequently liquidity. On the other hand, with an increase in the exchange rate, the government's expenses usually increase more than its income, which can lead to an increase in the government's budget deficit. Also, considering the existence of a monopoly in currency supply by the central bank, the hypothesis of using currency exchange revenues (the difference between free and budget-approved currency) will be applicable and this issue can raise the impact of the budget deficit on the exchange rate. Therefore, there has always been a serious challenge among economists as well as macroeconomic decision-makers about the connectedness between macroeconomic variables. What is the main driver of the network between macro variables? Is there a different way of communication in different thresholds of their growth rate? These cases show that it is very important to examine the time-varying interrelationships between these macroeconomic variables.
Accordingly, there is a complex connection between exchange rate, inflation, budget deficit and liquidity, which can be varied in different years. Therefore, in this research, using the TVP-TVAR technique, the time-varying connectedness across exchange rate, inflation, budget deficit and liquidity is examined during March, 2006 to August, 2023.
Methodology
In the current research, the relationship between exchange rate fluctuations, inflation, government budget deficit and liquidity based on monthly data using the TVP-TVAR technique is investigated. It should be noted that all the required information is extracted from the economic indicators of the central bank, and the government's budget deficit data from 2017 onward are extracted from Iran's Program and Budget Organization.
Findings
The results show that exchange rate and liquidity are, respectively, the largest net transmitter of volatilities in the network. Moreover, inflation rate and government budget deficit, respectively, are the largest net receivers of shocks from network. On average, the TCI is 23%, and more than 70% of this interrelationship between variables is explained by other factors such as political ones. Moreover, if the variables underestimated grow up to 36% annually (3% monthly), the connection between them will be cut off. In the conditions of decreasing the growth rate of variables up to -3% per month, the exchange rate has played a dominant role and its volatilities are transferred more strongly to inflation rate and less strongly to the budget deficit and liquidity.
If the growth rate of the variables is up to 24% annually (threshold of +2% monthly growth rate), the exchange rate volatilities are transferred to inflation and no interconnectedness between other variables is observed.
Discussion and Conclusion
Our results show that, on average, the total connectedness index from 2012 to 2016 has been upward, which is caused by the tightening of sanctions and the increase in inflationary expectations, psychological factors and emotions. Moreover, the connectedness between them is increased in 2018 and 2019, which is related to the intensification of sanctions and the reduction of currency supply and the increase in inflation and budget deficit and subsequently the increase in the issuance of debt securities in the capital market in order to manage the budget deficit and as a result increase liquidity. The results show that exchange rate is a main net transmitter of volatilities in most years and the inflation rate is a main net receiver of volatilities in many years. From 2016 onwards, the budget deficit is the net receiver of shocks from network in most periods, except for one period in 2019. It is interesting to note that in 2019, with the increase in the budget deficit and the issuance of debt securities, the budget deficit is transmitter, liquidity is receiver and inflation is more receiver variable than liquidity in the network. Totally, the results show that exchange rate is the major net transmitter of shocks to other macro variables.
Moreover, based on the results of the sensitivity analysis and thresholds effect, if the growth rate of variables is up to 24% annually (threshold of +2% monthly growth rate), the exchange rate fluctuations will be transferred to inflation and no connection between other components is observed. This shows that the macroeconomic management of the economy is very sensitive to the growth rate of the thresholds of the macroeconomic components, and before the political economy and also the factors of expectations and emotions dominated the economy, the macroeconomic management, especially the exchange rate, is required. Otherwise, it is impossible to manage the investigated variables with monetary and fiscal policies. Therefore, the managed floating exchange rate should be taken into consideration and if the goal is to manage the network using macroeconomic theories, the variables should not be allowed to increase by more than 24% annual growth. Other factors such as the political economy, and especially inflationary expectations will get the dominant role in the economy
Kiumars Aghaei, Amir Jabbari, Mohammad Karimi,
Volume 8, Issue 2 (7-2008)
Volume 8, Issue 2 (7-2008)
Abstract
Recent discussions on macroeconomic policy in developing and developed countries have emphasized the crucial role played by the real exchange rate in the adjustment process. There is a growing agreement that sustained real exchange rate misalignment will usually generate severe macroeconomic disequilibria through affecting macroeconomic variables. This study aims to investigate the sources of macroeconomic variable fluctuations in Iran focusing on real exchange rate. We implement the model with a structural VAR model and variance decomposition technique using annual macroeconomic time series data of the Iranian economy from 1970 to 2005. The findings suggest that real exchange rate fluctuations in Iran are mostly explained by monetary shocks as well as oil price shocks. Moreover, the results show that major part of income fluctuations in Iran are due to the price shocks, oil price shocks, money shocks, and supply shocks. This paper recommends that diversifying the economy, developing infrastructure, stabilizing prices, increasing investment, reducing money fluctuations, and controlling money supply may well then contribute to improve growth performance in the economy. According to our results, money disturbances and oil prices effect significantly real exchange rate fluctuations. So, this paper suggests that conducting monetary policy requires a greater caution to stabilize the economy.
Seyyed Foad Moosavi, Azadeh Mehrabian,
Volume 16, Issue 3 (11-2016)
Volume 16, Issue 3 (11-2016)
Abstract
The long run economic growth is one of the main economic requirements of countries in order to attain comprehensive development and increase the social welfare. This research aims to examine the effect of output uncertainty on economic growth for Iran during 1965-2011. Output uncertainty, gross domestic product, inflation and population are variables under study. In this paper, first, output uncertainty is computed using a generalized auto-regressive conditional heteroscedasticity (GARCH) model and then the effect of output uncertainty on economic growth is estimated though co-integration test and vector auto-regression (VAR). The findings show that output uncertainty reduces the long run economic growth in Iran. This result is in accordance with Bernanke (1983) and Pindyck (1991) studies. They concluded that increase in output uncertainty leads to decrease in both investment and long run economic growth. The findings also indicate the negative and positive effects of inflation and population growth, respectively, on the long run economic growth in Iran.
Mr. Ahad Seifi Koshki, Dr Seyed Jamaledin Mohseni Zonouzi, Dr Ali Rezazadeh,
Volume 20, Issue 3 (9-2020)
Volume 20, Issue 3 (9-2020)
Abstract
Macroeconomic policy makers and planners always use different tools to achieve economic goals. Credit control is one of these tools. The boom and recession of the financial sector of the economy are called the credit cycle, and of the real sector is called the business cycle. Credit as a complementary input for capital, intermediate goods, and primitive materials can be effective in improving business cycles. This study, by employing Structural Vector Auto Regressive (SVAR) model and using the annual data of Iran during 1973 to 2016, investigates the relationship between credit cycles and business cycles in Iranian economy. The results show that credit cycle has positive effect on business cycle, but business cycle has negative effect on credit cycle. Credit cycle fluctuations have the largest share in explaining the business cycle fluctuations, but business cycle ranks the fourth in explaining the credit cycle fluctuations following own variable, inflation rate and consumption shocks. The investigation of the co-movement between the credit cycle and the business cycle also show that the effect of the credit cycle on the business cycle is revealed from the second period and there is 24 years of co-movement between these cycles. Also, the persistence of the co-movement between these cycles in expansion - improvement phases has causes severe financial crises in the Iranian economy in the long run.
Dr Leila Torki, Baran Mazaheri,
Volume 22, Issue 4 (12-2022)
Volume 22, Issue 4 (12-2022)
Abstract
Aim and Introduction
Financial sanctions have long been a powerful tool for countries to achieve their political goals and secure their interests. Countries usually apply economic sanctions when they intend to force the target country to change certain policies that are not acceptable to the sending countries. The impact of financial sanctions may be far beyond the scope of a country's economy, so that in addition to affect the economy, it can also have a negative effect on the politics, culture, and social welfare of the target country. Iran has always been under the pressure of many sanctions. Therefore, due to the many sanctions that have been imposed on Iran over the years, the concern of many economists has always been how these sanctions affect Iran's economy. The economic and legal dimensions of sanctions as well as their diversity make it difficult to evaluate the implications related to sanctions on macroeconomic variables.
By examining the studies conducted in the field of financial sanctions and their effects on economic variables, it was found that most of these studies had investigated the effect of sanctions on two or more macro-economic variables, However, in the present study, the most important macroeconomic variables are included in the model and analyzed. Another innovation that distinguishes this research from other studies is the research method used in this research, which has not been used in Iran for the subject under study.
First, the optimal interval of the model is determined using the Hannan-Quinn statistic, then the Bayesian vector regression model is estimated using the optimal interval, and then the effect of financial sanctions on the variables of the model is investigated. In order to create a comparative framework, the results of the Bayesian VAR model are analyzed, and the results of both BVAR and VAR models are compared. It should be noted that Eviews 12 and 16, Excel and Matlab 2021 softwares were are used to estimate the model and analyze the results and form the instantaneous response function.
Findings
After estimating the Bayesian vector auto-regression model with the SSVS prior, the results of the instantaneous response functions are as follows:
The effect of the shock on the variable of fixed investments is negative and decreasing. The effect of the shock on the price index variable of consumer goods and services is positive and increasing. The effect of the shock on the export variable is negative and decreasing. The effect of the shock on the import variable is negative and decreasing. The effect of the shock on the GDP variable is negative and decreasing. The effect of the shock on the variable of overdue loans to the private sector is positive and increasing. The shock effect in the monetary base variable is negative and increasing. The effect of the shock on the country's external debt variable is negative and increasing. The effect of the shock on the variable of the currency market pressure index is negative and increasing.
After estimating the vector auto-regression model, the results of the instantaneous response functions are as follows:
The effect of the shock on the variable of fixed investments is negative and increasing. The effect of the shock in the price index variable of consumer goods and services is negative and increasing. The effect of the shock on the export variable cannot be investigated. The effect of the shock on the import variable cannot be investigated. The effect of the shock on the GDP variable is negative and variable. The effect of the shock on the variable of overdue loans to the private sector is negative and variable. The effect of the shock on the monetary base variable is negative and variable. The effect of the shock on the country's external debt variable is negative and increasing. The effect of the shock on the variable of the currency market pressure index is positive and variable.
As it is clear from the results, the information obtained from the auto-regression vector model is very inaccurate and with high variance, and the reason for this is, as previously stated, the existence of many parameters and the reduction of the degree of freedom of the model, which causes the accuracy to decrease. The estimate as well as the dispersion function becomes instantaneous. But Bayesian models solve this problem by shrinking the model and increase the estimation accuracy. As it is clear from the instantaneous response functions obtained by this method, the graphs have less dispersion and are much closer to the middle line, and also by examining the results, it can be said that the results are consistent with experimental studies and predictions taken is closer.
Discussion and Conclusion
The lack of appropriate quantitative indicators has caused most of the studies related to the investigation of the effects of sanctions to be focused on the explanation of the channels of the impact of the sanctions on the economic environment. Sanctions affect various economic sectors such as trade, investment, employment and economic growth regardless of success or failure in achieving the ultimate goal. Therefore, for accurate policies in these areas, it is necessary to evaluate the exact amount of the effects of sanctions on these sectors based on quantitative models, along with the influence channels.
According to the results of the auto-regression Bayesian vector model with SSVS prior, financial sanctions have a negative effect on the GDP and cause it to decrease. With the decrease in the productive capacity of the economy, fixed investments also decrease. A decrease in economic growth causes a recession. A decrease in private consumption, private investment, and a decrease in economic growth can greatly strengthen the recessionary conditions, therefore, it is recommended that the government, while managing the budget, avoid excessive reductions in construction costs, so that by strengthening the effective demand in the economy, it can bring it out of stagnation.
On the other hand, financial sanctions reduce the country's exports and imports and increase the country's foreign debt. Therefore, it is suggested that the import of luxury goods, which have a high value, should be put on the agenda in the conditions of prohibited sanctions and self-sufficiency in the production of some imported products. Besides, increasing the diversification of export goods can partially compensate for the decrease in exports. In this case, the policy of supporting domestically produced goods and export-oriented goods is recommended.
Since financial sanctions increase the pressure index of the currency market, it is suggested to prevent the entry of luxury goods and to put autarky in the production of these goods. In this regard, the creation of knowledge-based companies and the creation of career guidance and specialized employment offices in universities and the policies of training human resources in the specialties needed by society should be included in the goals of the country's vision.
Mr. Jafar Mokhtari Shirehjini, Dr. Ebrahim Hadian, Dr. Ali Hussein Samadi, Dr. Ahmad Sadraei Javaheri,
Volume 23, Issue 4 (12-2023)
Volume 23, Issue 4 (12-2023)
Abstract
Introduction:
The interactions of economies have caused the sensitivity to choose import sources, target markets and trade partners in general. Each country chooses its own trade partners based on its coordinates in order to minimize its import costs and generate maximum export income while avoiding the negative effects of international economic fluctuations. Diversification of trade partners is one of the ways to strengthen of an economy and reduce the vulnerability against international economic fluctuations and shocks. Diversification of import sources and export destinations of each country can lead to the stability of foreign trade and increase the stability of domestic production. In Iran's economy, due to the special conditions, such as economic sanctions, this issue is of double importance. In the previous periods of sanctions (before 2017), one of the weak points of Iran's economy has been the decrease in diversity in the mix of foreign trading partners, which includes the decrease in the number of buyers of oil (as Iran's main export product), the decrease in the arrival of foreign tourists, and the reduction of countries exporting goods to Iran. In this situation, two countries, China and Russia, became Iran's main trade partners, and to some extent, it reduced the impact of Western economic sanctions against Iran's economy. Meanwhile, in the last two decades, China has practically become the main competitor and substitute for the economic powers of the world, known as the OECD member countries, and has acquired large markets in South and East Asia, the Middle East and Africa. Therefore, it can be said that diversification of trade partners for all countries of the world practically means creating opportunities and for Iran, it means a way to survive.
Methodology:
The present research is based on the "Locomotive theory", which expresses the influence and effectiveness of the economic fluctuations of countries on each other through foreign trade. For this purpose, two models with the same structure were designed for two periods during 1970- 2018 to investigate the role of China's presence or absence among Iran's trading partners using the structural vector auto-regression (SVAR) model. According to the "Locomotive theory", international economic fluctuations affect countries through foreign trade, and only a few countries have the potential to bring countries out of the crisis. This theory states that during 1975-77, the United States was the main "locomotive" to pull out the world economy (more precisely, the industrialized countries) from the previous recession (the first oil shock), and paid a very high price for it, and it was necessary for America's major partners in that period, especially Japan and Germany, to accept their role as the locomotive of the world economy and in this way help both the American economy and the world economy. This theory specifically states that industrialized countries are the sources of international economic fluctuations and their prosperity or recession first spreads to major partners and with a delay to other countries.
The monetary and financial policies of the United States have played a decisive role in the development of global economic cycles through trade and financial links with smaller countries. In recent decades, although the importance and role of the United States has remained, but the US economy is not growing fast enough to act as the sole locomotive of the world economy train, especially in the last decade. China alone, and other major emerging markets as a whole, have become important drivers of the global economy. China and other major emerging markets are increasingly interdependent. Because on the one hand, China is the main importer of raw materials, and on the other hand, it is a supplier of manufactured products and foreign investment. The occurrence of such a phenomenon in the field of international economy has attracted the attention of many researchers to discuss the role of business partners and examine the unilateral and mutual effects of such decisions.
According to a study conducted in 2015 by Assoumou Ella for Kenya, the trade relationship between a third world country and industrialized countries is drawn in the presence of an emerging economy. In this research, the same model is used for Iran's economy. For this purpose, in the present study, based on the theoretical and experimental literature of this field a structural vector auto-regression (SVAR) model has been designed and specified. The first reason for using this model is its design based on the theoretical structure, and second reason is to provide a framework in which a variable, while being endogenous, is affected by other endogenous variables; but it should not affect them. The second case is very important regarding Iran's economy; because the macroeconomic variables of Iran's economy for several reasons (weak structure of Iran's economy, the issue of sanctions, customs tariffs) have no significant effects on the macroeconomic variables of trading partners included in the model.
Results and Discussion:
The results of the analysis of the reaction functions show that in most cases, the fluctuations of the macroeconomic variables of Iran (including GDP, inflation, FDI, export and import) have decreased in response to the fluctuations of GDP and inflation of OECD countries after the inclusion of China in the model. So that the intensity of the impact of the shocks entered into the model has become milder and the time for disappearing of the shocks has also been shortened.
Conclusion:
The results show that the diversification of Iran's Trade partners during the mentioned period has reduced the effect of the economic fluctuations of OECD countries on the macroeconomic variables of Iran. This means more stability of Iran's economy, so diversification of trade partners leads to resiliency against international crises, especially in the context of sanctions.
The interactions of economies have caused the sensitivity to choose import sources, target markets and trade partners in general. Each country chooses its own trade partners based on its coordinates in order to minimize its import costs and generate maximum export income while avoiding the negative effects of international economic fluctuations. Diversification of trade partners is one of the ways to strengthen of an economy and reduce the vulnerability against international economic fluctuations and shocks. Diversification of import sources and export destinations of each country can lead to the stability of foreign trade and increase the stability of domestic production. In Iran's economy, due to the special conditions, such as economic sanctions, this issue is of double importance. In the previous periods of sanctions (before 2017), one of the weak points of Iran's economy has been the decrease in diversity in the mix of foreign trading partners, which includes the decrease in the number of buyers of oil (as Iran's main export product), the decrease in the arrival of foreign tourists, and the reduction of countries exporting goods to Iran. In this situation, two countries, China and Russia, became Iran's main trade partners, and to some extent, it reduced the impact of Western economic sanctions against Iran's economy. Meanwhile, in the last two decades, China has practically become the main competitor and substitute for the economic powers of the world, known as the OECD member countries, and has acquired large markets in South and East Asia, the Middle East and Africa. Therefore, it can be said that diversification of trade partners for all countries of the world practically means creating opportunities and for Iran, it means a way to survive.
Methodology:
The present research is based on the "Locomotive theory", which expresses the influence and effectiveness of the economic fluctuations of countries on each other through foreign trade. For this purpose, two models with the same structure were designed for two periods during 1970- 2018 to investigate the role of China's presence or absence among Iran's trading partners using the structural vector auto-regression (SVAR) model. According to the "Locomotive theory", international economic fluctuations affect countries through foreign trade, and only a few countries have the potential to bring countries out of the crisis. This theory states that during 1975-77, the United States was the main "locomotive" to pull out the world economy (more precisely, the industrialized countries) from the previous recession (the first oil shock), and paid a very high price for it, and it was necessary for America's major partners in that period, especially Japan and Germany, to accept their role as the locomotive of the world economy and in this way help both the American economy and the world economy. This theory specifically states that industrialized countries are the sources of international economic fluctuations and their prosperity or recession first spreads to major partners and with a delay to other countries.
The monetary and financial policies of the United States have played a decisive role in the development of global economic cycles through trade and financial links with smaller countries. In recent decades, although the importance and role of the United States has remained, but the US economy is not growing fast enough to act as the sole locomotive of the world economy train, especially in the last decade. China alone, and other major emerging markets as a whole, have become important drivers of the global economy. China and other major emerging markets are increasingly interdependent. Because on the one hand, China is the main importer of raw materials, and on the other hand, it is a supplier of manufactured products and foreign investment. The occurrence of such a phenomenon in the field of international economy has attracted the attention of many researchers to discuss the role of business partners and examine the unilateral and mutual effects of such decisions.
According to a study conducted in 2015 by Assoumou Ella for Kenya, the trade relationship between a third world country and industrialized countries is drawn in the presence of an emerging economy. In this research, the same model is used for Iran's economy. For this purpose, in the present study, based on the theoretical and experimental literature of this field a structural vector auto-regression (SVAR) model has been designed and specified. The first reason for using this model is its design based on the theoretical structure, and second reason is to provide a framework in which a variable, while being endogenous, is affected by other endogenous variables; but it should not affect them. The second case is very important regarding Iran's economy; because the macroeconomic variables of Iran's economy for several reasons (weak structure of Iran's economy, the issue of sanctions, customs tariffs) have no significant effects on the macroeconomic variables of trading partners included in the model.
Results and Discussion:
The results of the analysis of the reaction functions show that in most cases, the fluctuations of the macroeconomic variables of Iran (including GDP, inflation, FDI, export and import) have decreased in response to the fluctuations of GDP and inflation of OECD countries after the inclusion of China in the model. So that the intensity of the impact of the shocks entered into the model has become milder and the time for disappearing of the shocks has also been shortened.
Conclusion:
The results show that the diversification of Iran's Trade partners during the mentioned period has reduced the effect of the economic fluctuations of OECD countries on the macroeconomic variables of Iran. This means more stability of Iran's economy, so diversification of trade partners leads to resiliency against international crises, especially in the context of sanctions.
Mrs Simin Akbari, Dr Seyed Aziz Arman, Dr Abdolmajid Ahangari,
Volume 25, Issue 1 (3-2025)
Volume 25, Issue 1 (3-2025)
Abstract
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
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
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