The effect of exchange rate fluctuations on economic growth and inflation, 1340-1388

Subject Areas : Bi-quarterly Journal of development economics and planning

A. Tavakoli ¹ , N. Turquoise ² , F. Karimi ³

1 - . Associate Professor, School of Industrial and Systems, Isfahan University
2 - . Graduated from Department of Economic Development and Planning, Islamic Azad University of Khomeini Shahr
3 - . Assistant Professor, Islamic Azad University of Mobarakeh

Received: 2016-03-15 Accepted : 2016-03-15 Published : 2015-03-21

Keywords: Economic Growth, inflation rate, Exchange rate fluctuations,

Abstract :

The exchange rate is one of important macroeconomics indices which its fluctuation has large effects on economic growth and inflation rate. Therefore, the policymakers should take into account when   analyzing exchange rate behavior.Applying the econometrics of OLS and SUR methods, the present study uses a yearly time series of 1961 to 2009 to estimate the effects of exchange rate fluctuations on Iranian economic growth and inflation rate.  Both methods of Cover (1992) and GARCH are applied to calculate the fluctuations. In addition to the exchange rate fluctuations, the effects of oil price fluctuations, calculated using a GARCH method, is included in the model. The effect of exchange rate and oil price fluctuations along with other policy variables such as money liquidity and government expenditures are considered in the model.The estimated results show that the exchange rate and oil price fluctuations affect the economic growth and inflation rate:The positive and negative exchange rate fluctuations have direct effect on economic growth.The positive and negative exchange rate fluctuations have negative and positive effects on inflation rate, respectively.The (expected) exchange rate changed has a positive effect on the economic growth. This effect on inflation rate is negative.The oil price fluctuations have a positive effect on economic growth but a negative effect on inflation rate.Taking into account of both money liquidity and government expenditure changes, the effect of liquidity change is positive on economic growth and inflation rate, whereas; the government expenditure change only affects the economic growth positively. Overall, the effect of liquidity change overcomes the effect of government expenditure.  Comparing the effects of exchange rate and oil price changes on economic growth and inflation, the impact effect of exchange rate changes is more pronounce.

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