Nonlinear Exchange Rate Analysis in the Iranian Economy

Exchange rate pass-through (ERPT) means the impact of exchange rate fluctuations on domestic prices. The study of the relation between the exchange rate and the general level of domestic prices, known in the international financial literature as the exchange rate analysis, has been one of the most important and fundamental topics in the economic literature. This study investigates the nonlinear exchange rate pass-through in the Iranian economy in the period 1984 to 2019 using the Markov switching method. The results show that in the period under review, for a one percent increase in the exchange rate, the inflation rate increases by 74 percent. In other words, transfer to prices is not complete and exchange rate transition in the Iranian economy is incomplete. The imperfection of the exchange rate passage is due to the fact that the price of imported goods is probably not only a function of the exchange rate, but also other factors have contributed to the fluctuation of these prices.