Investigating the Relationship between Real Exchange Rate Misalignment and Imports of Intermediate-Capital and Consumer Goods in Iran

Volatility of the exchange rate and its deviation from the equilibrium path is one of the most important economic variables. Theoretical studies and empirical evidence show that the deviation of the exchange rate from its equilibrium path and its volatility can potentially affect trade (import and export), production and investment (domestic and foreign). Therefore, this study examines the relationship between real exchange rate misalignment and the import of intermediate – capital and consumer goods during the period of 1974 -2011. This study estimates real equilibrium exchange rate by applying behavioral equilibrium exchange rate (BEER) approach. Also the volatility of exchange rate is estimated by autoregressive conditional heteroskedasticity (ARCH) method. Finally the impact of these variables on the import of intermediate–capital and consumer goods are estimated by Fully Modified Ordinary Least Squares (FM-OLS). This study shows that the real exchange rate in Iran is constantly deviated from its equilibrium path.