Modelling the Effect of Exchange Rate Shocks on Investment in Agriculture Sector (Application of NARDL Method)

Developing economies suffer from high degree of macroeconomic uncertainty. Growth, inflation, real exchange rates and other key macroeconomic variables are much more volatile, and the consequences of this excess volatility for aggregate performance in several dimensions like growth, investment and trade, have attracted some attention in recent empirical literature. In the case of investment, this concern has been renewed by recent theoretical work identifying several channels through which uncertainty can impact investment, under various assumptions about risk aversion, adjustment costs to investment and other factors. Iran, has a high degree of uncertainty in the macroeconomic variables. One of the major challenges related to the management of the foreign exchange market in Iran comes back to agricultural investment. Among different investments in economic sectors, investment in agricultural sector possesses a special prominence and position since investment in agricultural sector not only induce the growth of production and employment in this very sector, but also encourages production and employment growth in other economic sectors. Therefore, identifying effective factors on investment in agricultural sector and adopting suitable policies for increasing investment, possesses a supreme prominence. In Iran, the notions of finance and investment have always been facing several difficulties due to deep independence to oil revenues and instability of its price as well as high risk it involves; and for this reason, investing in different sectors, including agriculture, has always experienced severe fluctuations.

Data on agricultural investment in Iran were provided by annual statistics from 1978-2016. All of the following data were gathered from the statistical office of the Central Bank of Iran including Investment in agricultural sector in Rials using a constant price of 2011 = 100, Annual real GDP using a constant price of 2011 = 100, Short run interest rate on bank facilities and loan, and loans given to agricultural sector by banks.NARDL Method When the order of integration is not the same for all variables then we use the lagged variables as proposed by Pesaran et al. (2001). Imagine two variables and their relation as follow:To check the asymmetries, we have to make a separate series for appreciation and depreciation as proposed by Bahmani-Oskooee and Soharabian (1992). A series of exchange rate will be divided in its positive movements or appreciation, as indicated by, and negative movements or depreciation, as indicated by, and is given as follows: To check the impact of positive and negative movements of one variable on the other variable, Equation above will be transformed as:  
The non-linear ARDL model can be described as follows 

In order to study the nonlinear effect of exchange rate and its shock on investment in agricultural sector, a NARDL model has been used. The results of Ramsey Reset Test show that the model is well-specified. LM test has been applied to investigate auto correlation. The results of LM test also reveal that the zero hypothesis is not rejected, and the final model does not have the problem of consistent correlation. The Breusch-Pagan-Godfrey Test (BPG) has been employed to investigate the phenomenon of heteroskedasticity. The results of this test also indicate that for the final model, the zero hypothesis is not rejected, and therefore the pattern do not have the problem of Heteroskedasticity. Positive shocks of exchange rate have shown a negative impact on agricultural investment in the current and previous two periods. While negative shocks of exchange rate have had a positive effect on current investment. NARDL pattern is a method which considers the short-run dynamics among the variables and estimates the long-run relationships as well. In this pattern first the dynamic model, then the long-run relation and error correcting pattern are fitted. The results of the Wald test show that the hypothesis of symmetry between positive and negative shocks is rejected and hence the effect of currency shocks is asymmetric. In the long run, changes in positive currency shocks have had a negative effect on investment. Results of F test also approve the long run relation. H0 is rejected and the presence of long-run relation is confirmed. The presence of co-integration among a set of economic variables provides a statistical base for using the error correction pattern. In the short term, current currency shocks and the previous two period currency shocks have had a negative and significant impact on agricultural investment. In Short term, changes in negative shock had no effect on investment. Also, after 1.5 periods, the short-term imbalances are adjusted in the long run.

This study used a non-linear autoregressive distributed lag (NARDL) model to check an asymmetrical relationship between Exchange volatilities and agricultural Investment. In current study, the Hodrick Prescott filter has been used to derive exchange rate volatilities. Results have shown that: 1) there is a negative and significant relationship between exchange rate shocks and investment in the agricultural sector in the short and long term. 2) With respect to negative impact of exchange rate on investing in agricultural sector, if this exchange rate increases remain stable, investment in the agricultural sector would decline very severe. Given the direct and historical impact of investing in the current period, investment will also be a problem for future years. Since given loan have had a positive impact on the investment, it is suggested that government increases these loans and facilities. The purpose of this policy is to prevent current investments decreases. 3) With respect to negative reaction of investment to US-Dollar-denominated shocks, the decline in US-Dollar dependency and the use of other high-yielding currencies such as the EURO currencies are appropriate. There are asymmetrical linkages between these two variables therefore negative exchange rate volatilities have positive effect and positive exchange rate volatilities have negative and significant effect on agricultural investment. The effect of negative shocks was less than the positive ones.