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

Articles in Press

Document Type : Research Article

Authors

1 Ph.D student Department of economics, Isf.c, Islamic Azaduniversity, Isfahan,Iran. azadeh.alikhani@iau.ac.ir

2 Faculty of Administrative Sciences and Economics, University of Isfahan, Isfahan, Iran

3 Islamic Azad University, Isfahan (Khorasgan) Branch, Isfahan, Iran

10.22084/aes.2025.30824.3783

Abstract

Exchange rate reforms in developing countries have often aimed at floating the exchange rate to unify official and parallel foreign exchange markets. This 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 capital goods price index has shown varied responses to shocks from the exchange rate unification policy, contingent on the country’s prevailing economic conditions. The intensity of this responsiveness has varied across different periods, and it appears that economic instabilities have increased the sensitivity of the capital goods price index to changes resulting from exchange rate unification. Consequently, this has led to the occurrence of the exchange rate pass-through phenomenon.

Exchange rate reforms in developing countries have often aimed at floating the exchange rate to unify official and parallel foreign exchange markets. This 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 capital goods price index has shown varied responses to shocks from the exchange rate unification policy, contingent on the country’s prevailing economic conditions. The intensity of this responsiveness has varied across different periods, and it appears that economic instabilities have increased the sensitivity of the capital goods price index to changes resulting from exchange rate unification. Consequently, this has led to the occurrence of the exchange rate pass-through phenomenon.

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Journal of Applied Economics Studies in Iran

Articles in Press, Accepted Manuscript
Available Online from 09 August 2025

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