Real exchange rate dynamics and implications for macroeconomic policy in Iran, 1961–92

This thesis uses a partial equilibrium framework to examine the short- and long-run determinants of the real exchange rate of the Iranian rial and the implications of changes in this real exchange rate for the real side of the Iranian economy over the period 1961–1992. The long-run determinants of the real exchange rate are found to be the terms of trade, trade policy, real income and investment, whereas in the short-run changes in domestic credit expansion and the effect of the war with Iraq have additional explanatory power. The change in the real exchange rate is shown to have strong effects on the demands for real imports and (non-oil) exports of Iran and on the level of real output. The policy implications are that consistent macroeconomic policies need to be pursued in conjunction with a dual exchange rate system.