Measuring Deviation from Long-run Equilibrium Path of Real Exchange Rate in Iran: An Application of a Structural Trade Model

It is assumed the exchange rate would affect resources balance through a switching – expenditure mechanism. Accordingly, the behavior of real exhange rate can be examined empirically. Of all structural models, the most applicable procedure relies on the partial trade model, which is specified based upon the basic equilibrium of Williamson exchange rate. Considering a specific concept of desired current account, this sort of model identifies a frame of the real exchange rate (Borowski and Couharde 2000). In a new classical framework, saving can be equivalent to difference between production and consumption plus payments of external debt interests. Consumption is also invariant on the basic of the life cycle theory. An optimal (desired) current accunt can thus be as a result of difference between investment and saving plus interests of external debt. Hence, development in real exchange rate can provide the desired conditions of the current account blance, which is called as a basic equilibrium (Williamson 1994).Due to assumptios of a trade model, the relative gap between potential and actual production is one of the main determinants of real exchange rate, which is computed, in the present study, by the filtering Hodrick-Prescott method for Iran. Determining optimal current account, the paper concludes that the relevant values obtained are negative for pre-revolutionary period, whereas they are positive for post-revolotionary period. The results are quite well-matched with Iran’s present economic condition.Overall, empirical results of equilibrium trade model for Iran reveal the fact that deviation from long-run equilibrium path of the real exchange rate has gradually diminished, even though it has been accompanied by correspondent fluctuations in Iran’s economic situation.