Investigating the Relationship between Exchange Rate and Interest Rate in Iran's Economy: A Wavelet Coherence Approach

Document Type : Research Article

Authors

1 PhD student in Monetary Economics, Department of Economics, Aliguderz Branch, Islamic Azad University, Aliguderz, Iran

2 Assistant Professor, Department of Economics, Ayatollah Boroujerdi University, Borujerd, Iran

3 Assistant Professor of Mathematics Department, Aligudarz Branch, Islamic Azad University, Aligudarz, Iran

Abstract

In the present study, by presenting the wavelet method (economic and physical analysis) and coherence analysis, the relationship between the real exchange rate and the real interest rate in the Iranian economy was re-explained based on the theory of purchasing power parity in the form of a monetary dual model in the short-term, medium-term and long-term time horizons. For this purpose, the data in available monthly and used during the period from April 1359 to March 1399. The results of the Granger causality test reject the assumption of causality in all time periods from the real interest rate to the real exchange rate, however, in the short term and in some periods, the causality relationship from the exchange rate Real is towards the real interest rate. Based on the results obtained (based on monthly data), for the real exchange rate index and the real interest rate, many correlation areas have been observed in intervals of less than one year, almost throughout the time period. This shows a strong correlation between the two variables in the short term. Also, the results indicate that the intensity and direction of the relationship between the two variables is not constant in the short term and has changed repeatedly, so that the monetary model cannot be interpreted with sticky prices. By moving from the short term to the long term, the relationship between the real interest rate and the real exchange rate index is in phase, and the real interest rate variable is leading and the real exchange rate is declining; Therefore, in the medium-term and long-term horizon, a direct relationship between these two variables can be seen to an extent that confirms the theory of purchasing power parity (monetary model with flexible prices).

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Main Subjects

References

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Journal of Applied Economics Studies in Iran
Volume 11, Issue 43
December 2022
Pages 137-172

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