The Impact of Exchange Rate Fluctuations on Economic Activities in Iran

The main objective of this study is to analyze the effect of exchange rate fluctuation on real output and the components of aggregate demand in Iran. The effect of exchange rate fluctuation -decomposed to expected and unexpected components - is considered beside fiscal and monetary policies. A system of equations, including real output, consumer expenditures, private investment, non- oil exports, and imports, is used in this study. Applying a SUR estimation method for the period of 1960 to 2007, the following results from the exchange rate shocks (positive and negative) were observed: The effect of increasing exchange rate (a negative shock) on consumer expenditures and non-oil exports is significant. As a result of exchange rate shock (money devaluation), the level of consumer expenditures rise and the level of non-oil exports decline. As the second result, the level of imports shows no response to exchange rate shocks. However, the government expenditures have positive effect on imports and its effects is higher than monetary policy. Finally, the exchange rate shocks show no effect on real domestic products and private investment.