Causal Relationship Between Exchange Rates and Monetary Base in the Iranian Economy New Findings from the WL-MCRC Model

Articles in Press

Document Type : Research Paper

Author

Economics, Department of economics and administrative science, Qom University

Abstract

This study examines the causal relationship between the monetary base and exchange rate in the Iranian economy using the ML-MCRC wavelet model and data from April 2001 to August 2024. These two variables, as key elements of economic policymaking, have significant mutual impacts on inflation, economic growth, purchasing power, and financial stability. The findings indicate that the effects of the monetary base on the exchange rate, and vice versa, vary across different time scales. Since 2012, with increased exchange rate volatility and multiple shocks, the impact of the exchange rate on the monetary base has strengthened. In the short term, this relationship has weakened and, in some periods, nearly neutralized, while in the long term, there is a significant and mutual influence between these variables. Market expectations and speculative behaviors have also played a key role in intensifying exchange rate fluctuations. The results suggest that the Central Bank's monetary policy has been predominantly reactive to exchange market volatility since 2012. Overall, there is a strong two-way correlation between the exchange rate and the monetary base in the long term, but in the short term, this correlation has diminished, with the impact of expectations at times outweighing actual changes. Furthermore, from April 2001 to 2012, the monetary base was influential, but from 2012 onward, with rising exchange rate fluctuations, the exchange rate has influenced the monetary base.

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Quarterly Journal of Applied Theories of Economics

Articles in Press, Accepted Manuscript
Available Online from 07 September 2025

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