The Effect of Exchange Rate Uncertainty on the Trade Balance of Iran: The Asymmetric Stochastic Volatility Model

Exchange rate is one of the effective factors on foreign trade. Besides the role of exchange rate in economy and economic conditions, its volatility has also an important effect. Exchange rate variation, in countries like Iran that the bulk of government revenues are provided from exports of oil, can affect economic performance. This study investigates the effect of real exchange rate and its uncertainty on Iran’s nonoil exports, imports and trade balance using quarterly data during 1374-1395. For this purpose, the real exchange rate uncertainty, using asymmetric stochastic volatility model which is more flexible than ARCH models, is calculated. Then the effect of real exchange rate uncertainty on Iran’s nonoil exports, imports and trade balance based on the Johansen – Juselius cointegration framework is estimated. The results, based on the three models, show that the real exchange rate has a negative and significant effect on Iran’s nonoil exports, imports and trade balance in the long run. Also, the real exchange rate uncertainty has a positive and significant effect on Iran’s nonoil exports and trade balance and a negative effect on imports.