Investigation of the Nonlinear Behavior of Real Exchange Rate in Iran

اقتصاد پولی مالی

Article 5, Volume 30, Issue 25, July 2023, Pages 135-163   

Document Type: پژوهشی

DOI: 10.22067/mfe.2023.16488.0

Authors

Niloofar Afkhami Rad¹; Taghi Ebrahimi Salari²; Mehdi Behnameh^{* 2}; Mohammad Javad Gorjipour³

¹Master in Economics, Ferdowsi University of Mashhad, Iran

²Associate Professor, Department of Economics, Ferdowsi University of Mashhad, Iran

³Ph. D Student in Economics, Ferdowsi University of Mashhad, Iran

Abstract

 
1- INTRODUCTION
The enabling factor for entering the process of globalization is the creation of a competitive enviroment. The goal is to achieve competitive power through growth, development, and improvement in the quality of life. Competitiveness is the foundation for the economic growth of countries worldwide, and the real exchange rate is a good indicator for examination of a country's competitiveness in global markets. It is a variable through which we can assess the relative price of traded and non-traded goods. If there are no changes in the relative prices of other countries in the world and the real exchange rate decreases, it indicates a weakening of the international competitiveness of domestically produced goods. High fluctuations and lack of stability in real exchange rates can create an unstable environment for international trade and, as a result, reduce trade. Given the significance of the real exchange rate in influencing other macroeconomic variables and creating an uncertain environment, having knowledge of the future changes in the real exchange rate can play a crucial role in assisting monetary authorities to increase employment levels and stabilize prices.
Since many microeconomic and macroeconomic variables are influenced by the exchange rate, a proper understanding of the linear or nonlinear behavior of the exchange rate can help policymakers, firms, and traders make accurate decisions in order to effectuate desired changes.
 
2- THEORETICAL FRAMEWORK
The relationship between the national currency and the value of the national currency against foreign currencies is called the exchange rate. In international banking, the term "currency" refers to foreign money, sometimes including the adjective "foreign" to distinguish it from the domestic or local currency of a country. Currency is not limited to banknotes issued by central banks. It includes documents such as checks, drafts, and promissory notes that are used for international payments.
Due to resource allocation based on relative prices in the free market, efficient resource allocation occurs when relative prices are properly adjusted and serve as an indicator of the real value of resources. The exchange rate is one of the most important prices, and deviations from equilibrium can disrupt the prices of other goods and services. Generally, exchange rates are divided into several categories: 1) Nominal exchange rate, 2) Real exchange rate, 3) Effective nominal exchange rate. The nominal exchange rate is the price of one unit of a currency in terms of another currency on a specific day and at a specific time. The mention of a specific time is necessary because the exchange rate may change during different hours of the day. It is common to express the price of one unit of foreign currency in terms of domestic currency in exchange rate calculations.
Changes in the real exchange rate have a significant impact on the balance of payments and the international competitiveness of a country. Economists agree that an inappropriate level of stability for the real exchange rate leads to a decrease in national welfare. Thus, the instability of the real exchange rate from its equilibrium level leads to severe imbalances in the economy.
 
3- METHODOLOGY
To investigate the nonlinear behavior of the real exchange rate in Iran and in order to examine the nonlinear behavior of the real exchange rate in Iranian economy during the years 2004:04- 2018:02 two models have been applied: Self-Exciting Threshold Autoregressive (SETAR) model and Logistic Smooth Transition Autoregressive (LSTAR) model.
 
4- RESULTS & DISCUSSION
The possibility of threshold behavior in the real exchange rate has been confirmed by Broock, Dechert, and Scheinkman (1987) and Hansen (1999) test. Subsequently, the threshold values for the growth of the real exchange rate were calculated to be 3.84% in the first model (SETAR) and 5% in the second model (LSTAR).
In the first model, when the growth rate of the real exchange rate is below 3.84%, the growth rate of real exchange rate is minimal and classified as a regime with low growth. If the growth rate of the real exchange rate exceeds the threshold value (3.84%), its stability increases. In other words, when the growth rate of the real exchange rate is severe in Iran's economy, it is expected to be stable.
In the second model, values less than 5% are classified as a regime with low growth, while values greater than 5% are classified as a regime with high growth. The estimated coefficients for different orders in the two regimes indicate that if the growth rate of the real exchange rate is greater than 5%, this variable will exhibit stable behavior. However, at values below the threshold, due to the insignificance of the coefficients, this property will not be applicable.
 
5- CONCLUSIONS & SUGGESTIONS
The results demonstrated the possibility of nonlinear behavior in the growth rate of the real exchange rate. After calculating the optimal order for AR and considering other econometric requirements (Hansen test), two models, namely SETAR and LSTAR, were estimated. The threshold value was calculated to be 3.84% for the first model and 5% for the second model. In both models, it was observed that as long as the growth rate of the real exchange rate remains in a severe regime, it exhibits significant stability and is positively influenced by its past values.

Keywords

Real Exchange Rate; Threshold Autoregressive Model; Smooth Transition Autoregressive Model

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