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Effect of Exchange Rate and Exchange Rate Uncertainty on Domestic Consumption of Iran

Seyed Jamaledin Mohseni Zonouzi (), Soleiman Feizi () and Akram Mosavi ()
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Seyed Jamaledin Mohseni Zonouzi: Assistant Professor of Economics, Urmia University
Soleiman Feizi: Assistant Professor of Economics, Urmia University
Akram Mosavi: M.A. in Economics, Urmia University

Quarterly Journal of Applied Theories of Economics, 2017, vol. 4, issue 3, 195-214

Abstract: The main objective of this study is to investigate the effect of exchange rate and exchange rate uncertainty on domestic consumption in Iran during 1988q2-2015q1.Therefore, GARCH method is used to estimate the exchange rate uncertainty and the Bonds test approach to ARDL models is used to analyze the existence of long-run relationship, and the Vector Error-Correction model is used to analyze the short-run deviations of variables from their long-run equilibrium values. The results indicate that the exchange rate has direct significant long run and short run effect on the consumption, but exchange rate uncertainty has indirect significant effect on the consumption in Iran. Positive relationship between exchange rate and consumption confirms the exchange rate path theory in Iran. Negative relationship between exchange rate uncertainty and consumption confirms absorption theory in Iran. The results suggest monetary authorities in Iran to adopt appropriate exchange policy for decreasing exchange rate uncertainties. Due to insignificant short run and significant long run effect of government expenditure on consumption, it is suggested to adopt managed government expenditure growth rate in mid-term program.

Keywords: Aggregate consumption; Exchange rate uncertainty; Exchange rate; GARCH; ARDL (search for similar items in EconPapers)
JEL-codes: C22 E21 G12 (search for similar items in EconPapers)
Date: 2017
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