Effect of Nominal Exchange Rate Volatility on Output in Iran’s Economy

Kazem Yavari (), Reza Najjarzade (), Hossein Tavakolian and Ali Bahador ()
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Kazem Yavari: School of Management & Economics, Tarbiat Modares University
Reza Najjarzade: School of Management & Economics, Tarbiat Modares University
Ali Bahador: School of Management & Economics, Tarbiat Modares University

Journal of Money and Economy, 2016, vol. 11, issue 4, 419-442

Abstract: Volatility of exchange rate while changes from time to time, is expected to affect firm level operations as well as aggregate level outcomes i.e. macroeconomic performance. This paper, investigates the effects of exchange rate volatility on aggregate production in Iran using a Structural Vector Auto Regressive model with Exogenous Variables (SVARX). The model is estimated based on macroeconomic data during 1990q2-2015q1. Impulse response functions show that realization of a positive shock to the exchange rate volatility-measured by quarterly coefficient of variation derived from daily exchange rate data set rather than common GARCH-based measures- is associated with a significant production drop. These results are robust in reference to changing output measures. We also provide some necessary sensitivity analysis to check robustness of the results with respect to recursive restrictions which are imposed to identify the structural model. After all this robustness checks the model confirmed negative effect of exchange rate volatility on output in Iran's economy. Furthermore, the results show that CPI and exchange rate will significantly increase when exchange rate volatility rises while import declines.

Keywords: Exchange Rate; Exchange Rate Volatility; Production (search for similar items in EconPapers)
JEL-codes: E23 F31 F32 F41 (search for similar items in EconPapers)
Date: 2016
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