Investigating the fluctuations of exchange rate based on monetary‐behaviour approach

Saeid Tajdini, Mohsen Mehrara and Ali Taiebnia

International Journal of Finance & Economics, 2023, vol. 28, issue 2, 1242-1249

Abstract: The purpose of this study is to investigate the excessive changes in the exchange rate in Iran during 2018 due to extreme speculation in the monetary and currency markets caused by numerous economic and political factors such as accumulated excessive liquidity, severe sanctions and foreign pressures. Based on purchasing power parity (PPP) theory, the foreign exchange rate has to be adjusted with the inflation rate. However, this study showed that in the critical situations the PPP theory, which adopts a long‐term and backward‐looking approach, no longer works, and instead the market tends to adopt a short‐term and prospective approach to exchange rates. In this study, the economic data of Iran and the United States were gathered from late 1978 to 21 September 2018, and by adding three other economic factors, including the difference of average annual growth rate of GDP per capita of 2% between the two countries, indicator of risk in low volatility period (1.16%) and high volatility one (1.49%), a new and risk‐based approach is presented based on the low and high volatility of the exchange rates to address the excessive changes not explained by conventional theories.

Date: 2023
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