Document Type : Original Article
Authors
1
Center of Governance Research,, University of Isfahan , Department of Economics,
2
Associate Professor, Isfahan University, Department of Economics
3
Center of Excellence for International Economics, Department of Economics, University of Isfahan
10.48308/jem.2024.234663.1892
Abstract
The real exchange rate reflects the level of competitiveness in the international arena. Therefore, choosing an appropriate policy plays a significant role in the stability of the country's economy. According to the Permanent Law of the country's development plans, the exchange rate should be adjusted considering the preservation of the competitiveness of foreign trade and taking into account the difference between domestic and foreign inflation rates. Therefore,, two policies, inflation-based exchange rate rule (based on the achieved inflation rate consistent with the country's economic policies) and the pattern including interest rate, are evaluated as suitable frameworks for analyzing the exchange rate rule based on inflation policy. First, the modified Edwards model (1989) is estimated for Iranian data during 1960-2020 using the ordinary least squares method. Then, in order to evaluate the impact of inflation shocks and interest rates on the behavior of the real exchange rate, impulse response function analysis is also used.
The results of study indicate that inflation shocks have long-term effects on the real exchange rate, and therefore, the occurrence of an exogenous inflation shock quickly leads to a deviation of the future exchange rate from its equilibrium level. On the other hand, according to the impulse response function of the interest rate, the effects of interest rate changes are adjusted at a slower pace, and the exchange rate returns to its equilibrium level. Therefore, adopting a rule-based exchange rate policy based on inflation targeting can help achieve the desired goals of the country's development plans.
Keywords
Main Subjects
)