Examination of Asymmetry of the Exchange rate pass-through on Expected Inflation in Iran

Document Type : Research Article

Authors

1 Razi University

2 Economic university- Razi university- kermanshah- iran

10.22084/aes.2024.29151.3683

Abstract

Among the factors affecting inflation and expected inflation, which has influenced many economic variables in Iran, is the exchange rate changes. The exchange rate transition phenomenon explains the relationship between the changes in the value of the national currency and the foreign trade relations of a country. Therefore, it is necessary to investigate the exchange rate pass-through on expected inflation in order to apply anti-inflationary economic policies. The aim of this study was to investigate the asymmetry of exchange rate crossing degree on expected inflation for Iran using nonlinear ARDL approach and relying on time series data during 1990-2020. Therefore, before estimating the model, the stationary order of the variables was evaluated by generalized Dickey-Fuller and Phillips-Peron tests, based on the results of these tests, the stationary variable that the absolute value of the calculated statistic is greater than the critical absolute value presented by Dickey-Fuller and Phillips-Peron tests. Therefore, all variables except government budget, unemployment rate, oil price, exchange rate were stationary and these variables were after taking first difference. Then, the long-term relationship between the variables was confirmed using Pesaran and Shin bounds testing procedure. Also, the results of the diagnostic test of the model confirmed the validity of the results. The Wald test was also performed to investigate symmetry and asymmetry, and the results of this study based on nonlinear ARDL model show that the effect of positive exchange rate shocks on expected inflation in the short and long term has a negative and significant effect but negative exchange rate shocks have a negative and meaningless effect on expected inflation. Also, according to the results of the study, the asymmetric effect of currency shocks on expected inflation was not confirmed in the short term while the asymmetric effect of currency shocks on expected inflation was confirmed in the long run.

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Journal of Applied Economics Studies in Iran

Articles in Press, Accepted Manuscript
Available Online from 16 April 2024

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