The Effects of Exchange Rate Passage with Emphasis on the Inflationary Environment of Iran's Economy and the Foreign Exchange Policy of the Central Bank in Order to Control the Market

Majid Sadeghi (), Jalil Totonchi (), Sayed yahya Abtahi () and Zohreh Tabatabeenasab ()
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Majid Sadeghi: PHD student, Islamic Azad University, Yazd Branch
Jalil Totonchi: Assistant Professor, Islamic Azad University, Yazd Branch
Sayed yahya Abtahi: Assistant Professor, Islamic Azad University, Yazd Branch
Zohreh Tabatabeenasab: Assistant Professor, Islamic Azad University, Yazd Branch

Quarterly Journal of Applied Theories of Economics, 2022, vol. 9, issue 2, 123-150

Abstract: The purpose of this article is the effects of exchange rate passage with emphasis on the inflationary environment of Iran's economy and the central bank's authority to control the foreign exchange market. Therefore, the STAR model based on quarterly data of Iranian economy during the period 2001:03 to 2019:04 was used. The results of estimating the linear part of the model (first regime) show that the variables of GDP, interest rate on facilities and money supply have a positive relationship with the price index in the Iranian economy. Also, the results of estimating the nonlinear part of the model (second regime) show the positive relationship between the variables of money supply, interest rate on facilities and exchange rate with the price index. The difference between the coefficients of the variables in the two regimes indicates that the effect of exchange rate variables and GDP growth on the price index in each regime is different. In the case of a low exchange rate (linear regime), economic growth has a positive effect on the price index and with an increase in the exchange rate, the price index will decrease; While in the high exchange rate regime (non-linear regime), the impact of economic growth on the price index is negative and an increase in the exchange rate will increase the price index. According to the results of artificial pricing, the exchange rate in the years before the crisis and preventing it from adjusting to the economic conditions is one of the main reasons for the currency crisis. Therefore, it is suggested that in order to reduce the pressure on the foreign exchange market, in proportion to the difference between Iran's inflation and global inflation, the official exchange rate should be adjusted annually to prevent currency shocks

Keywords: Exchange rate; inflation environment; central bank foreign exchange policy; STAR (search for similar items in EconPapers)
JEL-codes: E43 G21 O23 (search for similar items in EconPapers)
Date: 2022
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