Testing Existence of Rational Price Bubble in foreign exchange Market of Iran: Application of sequential Unit Root Tests

Document Type : Research Article

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Abstract

Beside inflation and interest rates, Exchange rate is one of the most important determinants of economic performance in the each country. Given the importance of the exchange rate in the economy, the main objective of this study is to investigate the existence of price bubbles in the foreign exchange market. To this end, a series of unit root tests that have recently been introduced in economics and monthly data of exchange rate (rial- dollar) for the period 1369:1-1392:12 is used. Based on Generalized Supremum Augmented Dickey- Fuller Test, multi price bubbles hypothesis was confirmed in the foreign exchange market of Iran (In Period 1372:11-1373:3, 1377:11-1378:11, 1381:3-1381:6, 1386:11-1387:2, 1387:9-1387:11, 1389:6-1392:6). Also Relative prices of tradable and non-tradable goods using shown that a part of explosive behavior of the exchange rate, due to the relative prices of tradable goods.

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