The Effects of Exchange Rate Fluctuations on the Exports Patterns of Iran

Since the collapse of Bretton Woods system and emergence of floating exchange rate regime, the world economy has been exposed to a higher uncertainty associated with greater foreign exchange rate fluctuations and volatility which could disturb world trade flow. Among different sectors of Iranian economy, the non-oil exports of Iran seem to react more to these fluctuations. The impact of exchange rate shocks on Iranian exports as an aggregate have been evaluated by previous studies. As a case study, the main objective of this study has been to investigate the effects of exchange rate shocks on the exports of different sectors of Iranian economy over 2002-2011 using a nonlinear Markov-Switching model. The empirical results suggest that the exchange rate shocks have changed the pattern of overall exports as well as export shares of the various segments of Iranian economy. The main conclusion reveals that the sectorial exports have responded differently to the exchange rate shocks. Moreover, despite positive effects of the exchange rate volatility on the exports of 5 sectors under study by the world financial crisis, the lack of attention to the non-oil exports by the policy makers has led to vulnerability of these sectors to the volatility.