Risk Preferences and Currency Crisis in the Iran's economy- Markov Switching Approach

Mahdi Aminirad (), Nader Mehregan (), Abolfazl Shahabadi () and Davood Jafariseresht ()
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Mahdi Aminirad: Ph.D of Economics of Bu-Ali Sina University, Hamedan, Iran
Nader Mehregan: Prof of Economics of Bu Ali Sina University, Hamedan, Iran
Abolfazl Shahabadi: Prof of Economics of Alzahra University, Tehran, Iran
Davood Jafariseresht: Assistant Prof of Economics, Bu-Ali Sina University, Hamedan, Iran

Quarterly Journal of Applied Theories of Economics, 2022, vol. 9, issue 2, 59-88

Abstract: The currency crisis is a phenomenon that has been widespread in recent years in Iran's economic and political meetings. Regardless of the political effects of this phenomenon, the occurrence of the currency crisis with increasing uncertainty will lead to undesirable effects on the economic structure of the country. The conversion of assets into foreign currency, capital outflows and the dollarization of the economy is only part of the consequences of the currency crisis. Therefore, in this study, using the quarterly data from spring 2002 to winter 2017 and using the Markov switching model, the currency crisis in Iran has been modeled. Then, based on the estimated coefficients of the model, the Currency Market Pressure Index during the spring of 2018 to the fall of 2021 has been predicted. Evidence from model estimation showed that economic growth, current account balance, capital account balance, real interest rate and long-term foreign debt have a negative effect and budget deficit, risk aversion level, foreign exchange rent and short-term foreign debt have a positive and significant effect on on the likelihood of a currency crisis in Iran. The estimation model also has a relatively good out-of-sample predictions.

Keywords: Currency Crisis; Currency Market Pressure Index; Risk Aversion; Markov Switching model (search for similar items in EconPapers)
JEL-codes: C24 F31 G01 (search for similar items in EconPapers)
Date: 2022
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