Analysis of the Symmetric and Asymmetric Effects of Monetary Policy on the Exchange Rate in Iran Using Linear and Nonlinear ARDL Models

Gholamhossein Golarzi and Mahnaz Khorasani
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Gholamhossein Golarzi: Associate Professor, Department of Business Management, Faculty of Economics and Management and Administrative Sciences, Semnan University, Semnan, Iran
Mahnaz Khorasani: Assistant Professor, Department of Management and Economics, Faculty of Financial Sciences, Management and Entrepreneurship, University of Kashan, Kashan, Iran

Quarterly Journal of Applied Theories of Economics, 2026, vol. 13, issue 3, 143-170

Abstract: The exchange rate, as a key variable linking the domestic and international economies, plays an important role in economic processes. The relationship between monetary policy and the exchange rate, particularly in developing economies, is considered one of the complex and challenging issues in the macroeconomic literature. The objective of this study is to examine the effects of monetary policy on the exchange rate in the Iranian economy, for which two approaches, ARDL and NARDL, are employed. The novelty of the study lies in the simultaneous application of these two models and the focus on analyzing the asymmetric response of the exchange rate to positive and negative monetary policy shocks. The study uses quarterly data covering the period from 2009 to 2024. The interbank interest rate is considered as the monetary policy instrument, while real non-oil gross domestic product (GDP), the Consumer Price Index (CPI), the global oil price, and domestic and global Economic Policy Uncertainty (EPU) indices are included in the model as control variables. In addition, a dummy variable for the Joint Comprehensive Plan of Action (JCPOA) is incorporated to account for the effects of political developments. The findings of the ARDL model show that the interbank interest rate has a negative and statistically significant effect on the exchange rate in the long run. The results of the NARDL model indicate a nonlinear and asymmetric relationship, such that positive interest-rate shocks lead to a decrease in the exchange rate, whereas negative interest-rate shocks lead to an increase in the exchange rate. Furthermore, real GDP has a negative effect, while the Consumer Price Index has a positive and statistically significant effect. The domestic Economic Policy Uncertainty index also has a positive effect, whereas the global Economic Policy Uncertainty index and the JCPOA dummy variable are statistically significant only in the NARDL model. Based on the findings, it is recommended that the Central Bank use the interbank interest rate as an active instrument for managing exchange-rate fluctuations and, by avoiding abrupt changes in monetary and exchange-rate policies, create conditions for reducing uncertainty and enhancing stability in the foreign exchange market.

Keywords: Exchange Rate; Interbank Interest Rate; Monetary Policies; Linear and Nonlinear Autoregressive Distributed Lag Model (search for similar items in EconPapers)
JEL-codes: C58 E44 F31 (search for similar items in EconPapers)
Date: 2026
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