Evaluating the Effect of Exchange Rate Unification on the Import Price Index of Capital Goods (Exchange Rate Pass-Through Approach) in Iran

Document Type : Research Article

Authors

1 Ph.D. Student of Economics, Department of Economics, Faculty of Islamic Governance, Isf.c, Islamic Azad University, Isfahan, Iran.

2 Professor, Department of International Economics, Faculty of Administrative Sciences and Economics, Isfahan University, Isfahan, Iran (Corresponding Author).

3 Associate Professor, Department of Economics, Faculty of Islamic Governance, Isf.c, Islamic Azad University, Isfahan, Iran.

10.22084/aes.2025.30824.3783

Abstract

Exchange rate reforms in developing countries have often aim to floating the exchange rate to unify official and parallel foreign exchange markets. The present study has examined the dynamic effects associated with such reforms, focusing on the exchange rate unification policy and its impact on the import price index of capital goods during the years 1978–2022. For this purpose, the variables affecting the import price index have been first identified using the Time-Varying Parameters Dynamic Model Averaging (TVP_DMA) framework. Then, the Time-Varying Parameter Vector Autoregression (TVP-VAR) model has been used to analyze how the import price index is affected by the exchange rate unification shock.  According to the empirical findings, the variables of economic growth, the exchange market pressure index, the import dependency ratio, trade tariffs, and the exchange rate unification index are among the most influential factors affecting the import price index of capital goods in Iran. The import price index of capital goods has exhibited varying responses to shocks arising from exchange rate unification policies, depending on the prevailing economic conditions of the country. The magnitude of this impact has fluctuated across different periods; specifically, heightened economic instability has increased the sensitivity of the capital goods price index to changes in the exchange rate unification index. This effect became more pronounced during the 2010s. particularly at the beginning and end of the decade, when the national economy was heavily influenced by external factors and exceptional circumstances. As pressures on various economic sectors intensified during this era, the response of the import price index of capital goods to the gap between official and informal exchange rates became significantly more severe than in other periods. Consequently, these conditions led to a situation where shocks from exchange rate unification policies resulted in a sharp surge in the import price index of capital goods.

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References

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Journal of Applied Economics Studies in Iran
Volume 14, Issue 56
February 2026
Pages 9-44

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