The Evaluation of the Impact of Volatility of Oil Revenue on the Relationship between Exchange Rate and Trade Balance of Iran: Non-Linear Approach

The main objective of this study is to investigate the non-linear impacts of volatility of oil revenue on the relationship between exchange rate and trade balance of Iran. For this purpose, using annual time series over the period 1973 to 2016, volatility of oil revenue as the most important prevailing features of Iran economy has been quantified using EGARCH approach. After that the effect on the relationship between exchange rate and trade balance has been estimated applying Markov-Switching technique. The empirical findings indicate that trade balance follow triple trade regimes (high, medium and low trade deficit). volatility of oil revenue in 2 regimes (low and high trade deficit) have negative and significant impact on the relationship between exchange rate and trade balance. So that volatility of oil revenue has caused to debilitation of exchange rate effect on the trade balance.