The effect of foreign exchange policies to reduce the current account deficit (with emphasis on the financial crisis of 2008)

Exchange rate fluctuations and its deviation from the equilibrium path is one of the most important macroeconomic variables that affects different sectors of the economy from various aspects.

This study was conducted with the aim of investigating the effect of foreign exchange policies during the existence of a trade deficit in the financial crisis (crisis of 2008) on the total index of the stock exchange.

The present study was conducted using ARDL and VCEM approaches in terms of purpose, application and development. This study examines the relationship between exchange rates (as a control policy to reduce the current account deficit due to the 2008 crisis) and the overall index. Examines the Iranian Stock Exchange. To reduce the effect of the omitted potential variable, interest rates and external reserves are also included in this analysis. In this study, the self-return approach with distributive interrupt (Pesaran, 2001) has been used to investigate the long-run relationship between variables.       

Among the actions of governments in times of crises and deficits in the current account balance is the use of foreign exchange controls. Explaining the effects of the exchange rate due to the dependence of the stock market industries on the import of raw materials as well as the export of products on the overall index of the stock exchange is very important for policymakers and activists in this field.                                                                                                                                      

The results indicate that there is more compatibility between exchange rates and stock prices in critical periods than in quiet periods, in terms of integration in the long run and short-term causality. Also, the results of the implementation of foreign exchange policies, in order to improve the current account, confirm the J-curve.