Empirical Examination of Monetary Model of Exchange Rate in Iran Using Markov Switching Approach

Asgharpur, Hussein; Rezazadeh, Ali; Mohammadpoor, Sivas; Jahangiri, Khalil Jahangiri

Empirical Examination of Monetary Model of Exchange Rate in Iran Using Markov Switching Approach

Document Type : Research Paper

Authors

¹ Assistant professor, Economics Department, University of Tabriz

² Ph.D Student of Economics, University of Tabriz

³ M.A. Student of economics, University of Tabriz

⁴ . Ph.D Student of Economics, University of Tabriz

Abstract

The main subject of this paper is to examine the monetary model of exchange rate in Iran during post Islamic revolution. In this way, a monetary model with flexible prices using Markov Switching approach is estimated. Based on the estimation results, years 1979-1989 are in regime one that match with the fixed exchange rate regime years in Iran and years 1990-2008 are in regime two and are in accordance with floating exchange rate regime. The results also show that there is a support for monetary exchange rate model in one of the two regimes. Based on the results and current exchange rate regime, it is recommended from policymakers that in order to make the exchange rate to be appreciable, they must accelerate the economic growth, control the price levels and liquidity in the economy using the appropriate monetary policies.

Keywords