The impact of oil shocks on exchange rate in Iran: A Markov-switching approach

The main objective of this study was to investigate the effects of oil supply, global economic demand and oil price shocks on the real exchange in Iran. For this purpose, the monthly data of variables during April 1990 and September 2015 are examined. First, the oil shocks using the SVAR model obtained and then their impact on the exchange rate has been investigated using Markov switching model with 2 regimes.
The results show that the real exchange rate in Iran often has been in low volatility regime (regime II) and has been on the decline. In this regime, oil price shocks and the global economic demand shocks have significant negative impact on the real exchange rate. In other words, a positive global demand and oil price shocks that caused the boom in the global economy, led to a decline in the exchange rate and appreciation pressures the national currency. The oil supply shocks do not have a statistically significant impact on exchange rate in Iran economy.