Document Type : Research Paper

Author

Assistant Professor, Faculty of Economics & Administrative Sciences, Ferdowsi University of Mashhad, Mashhad, Iran

Abstract

The effect of exchange rate changes on the general level of prices is one of the major issues in macroeconomics and has important results for the monetary policy maker. With respect to these two variables in Iran's economy, modern econometric approaches can provide new insights. In this regard, using the threshold vector autoregressive model, the present study attempts to investigate the nonlinear exchange rate pass-through in Iran during 1369:1 – 1397:4. The results show that pass trough of exchange rate to the general price levels depends on the amount of inflation (inflationary conditions and its threshold). If seasonal inflation exceeds from 5.48%, the exchange rate shocks has lower effect on inflation. The results show that, exchange rate shocks have a severe effect. Due to the lack of inflation targeting policy in the Iran’s economy, the impact of exchange rate shocks on inflation is lower in values below the level of 5.48%. Accordingly, in inflation rates below the threshold, monetary policy has less freedom of action and the goals of reducing inflation and exchange rate policies need to be taken into account simultaneously.

Keywords

Main Subjects

Abtahi, S. Y. (2017). An analysis of the exchange rate pass-through and the inflation dynamics in Iran: regime switching approach. The Journal of Economic Policy, 9(18), 21-40. [In Persian]
Aleem, A., & Lahiani, A. (2014). A threshold vector autoregression model of exchange rate pass-through in Mexico. Research in International Business and Finance, 30, 24-33.
Asgharpur, H., Kazerooni, A., & Mirani, N. (2015). The impact of inflationary environment on exchange rate pass-through to the import price index in Iran. Quarterly Journal of Applied Theories of Economics, 2(2), 155-178. [In Persian]
Asgharpour, H., Vafaei, E., & Abdolmaleki, H. (2018). The exchange rate asymmetric pass-through to import price index: The case study of Iran. Iranian Journal of Economic Studies, 6(1), 47-64. [In Persian]
Choudhri, E. U., & Hakura, D. S. (2006). Exchange rate pass-through to domestic prices: does the inflationary environment matter?. Journal of international Money and Finance, 25(4), 614-639.
Donayre, L., & Panovska, I. (2016). State-dependent exchange rate pass-through behavior. Journal of International Money and Finance, 64, 170-195.
Farzin Vash, A., Asgharpour, H., (2007), Investigating the asymmetric effects of exchange rate fluctuations on production and prices in Iran, Economics (Economic Modeling) Firoozkooh Azad University, 1,139-146. [In Persian]
Fuji, E., & Bailliu, J. (2004). Exchange rate pass-through and the inflation environment in industrialized countries: An empirical investigation (No. 135). Society for computational economics.
Gholami, E., & Hozhabr Kiani, K. (2015). Investigation of fiscal stimulus programs effects on economic growth in Iran using TVAR model. Journal of applied economics studies in Iran, 4(13), 127-143. [In Persian]
Goldberg, P. K., & Knetter, M. M. (1996). Goods prices and exchange rates: what have we learned? Journal of Economic Literature, 35, 1243-1272.
Hüfner, F. P., & Schröder, M. (2002). Exchange rate pass-through to consumer prices: A European perspective.
Jaffri, A. A. (2010). Exchange rate pass-through to consumer prices in Pakistan: Does misalignment matter? The Pakistan Development Review, 49 (1) ,19-35.
Khoshbakht, A., Akhbari, M., (2008) Exchange rate pass-through to consumer price indexes and import in Iran, economics research, 27, 51-82. [In Persian]
Lashkaripour, F. (1395). Investigating exchange rate pass-through to consumers in Iran. Master’s thesis. Ferdowsi University of Mashhad. [In Persian]
Laflèche, T. (1996). The impact of exchange rate movements on consumer prices. Bank of Canada review, 1996(Winter), 21-32.
Lin, P. C., & Wu, C. S. (2012). Exchange rate pass-through in deflation: The case of Taiwan. International Review of Economics & Finance, 22(1), 101-111.
Lo, M. C., & Zivot, E. (2001). Threshold cointegration and nonlinear adjustment to the law of one price. Macroeconomic Dynamics, 5(4), 533-576.
McCarthy, J. (2007). Pass-through of exchange rates and import prices to domestic inflation in some industrialized economies. Eastern Economic Journal, 33(4), 511-537.
Patnaik, I., Shah, A., & Bhattacharya, R. (2011). Monetary polictransmission in an emerging market setting. International Monetary Fund.
Seyyedkolaee, M. A., Tehranchian, A. M., Jafari Samimi, A., & Mojaverian, M. (2016). The impact of exchange rate pass-through via domestic prices on inflation in Iran: New evidence from a threshold regression. International Journal of Business and Development Studies, 8(1), 77-96.
Snowdon, B., & Vane, H. R. (2005). Modern macroeconomics: its origins, development and current state. Edward Elgar publishing.
Stigler, M. (2010). Threshold cointegration: overview and implementation in R. R package version 0.7-2. URL http://stat.ethz. ch/CRAN/web/packages/tsDyn/vignettes/ThCointOverview.pdf
Tayebi, K., Nasrollahi, K., Yazdani, M., & Malekhosseini, H. (2015). Analyzing the effect of exchange rate pass-through on inflation in Iran (1991-2012). Journal of Economic Policy, 20(63), 1-36. [In Persian] 
Taylor, J. B. (2000). Low inflation, pass-through, and the pricing power of firms. European economic review, 44(7), 1389-1408.
Tica, J., & Posedel, P. (2009). Threshold model of the exchange rate pass-through effect: The case of Croatia. Eastern European Economics, 47(6), 43-59.
Yazdani, M., & Zare, S. (2016). Investigating effect of exchange rate shocks on inflation in Iranian economy during seasonal period 2000-2012. Journal of Applied Economics Studies in Iran, 5(17), 171-197. [In Persian]