Macroeconomic Uncertainty, Political Risk and Exchange Rate Market Fluctuations in Iran

Document Type : Research Paper

Authors

1 Assistant Professor of Economics, University of Kurdistan

2 Ph.D. in Economics, Bu-Ali Sina University

3 Ph.D. Student in Economics, University of Tarbiat Modares

Abstract

One of the most vital concerns of economists and policymakers is finding the root of economic fluctuations and minimizing them. The political situation in Iran, the existence of economic sanctions, and uncertainty in the economy have caused severe fluctuations in the exchange rate market during the last few decades. The main goal of this research is to investigate the effect of macroeconomic uncertainty and political risk on the fluctuations of the foreign exchange market in Iran from 1991 to 2020 using the vector autoregression method with time-varying parameters (TVP-VAR). To achieve this goal, the macroeconomic uncertainty index was first measured using seven economic sectors, including production, energy, price, monetary and credit variables, currency and foreign trade, and financial and stock market variables. The results of this research indicate an increasing and very strong effect of the macroeconomic uncertainty index on exchange rate fluctuations in Iran. On the other hand, political risk has had an increasing effect on exchange rate fluctuations in Iran, except during the nuclear agreement period (2014 - 2017). Moreover, other results of the research indicate the increasing and very strong effect of housing price fluctuations and gold price fluctuations on exchange rate fluctuations in Iran, while stock market fluctuations have a decreasing effect on currency market fluctuations in Iran.

Keywords

Main Subjects

References

  1. Javaheri, B., Habibi, F., & Amani, R. (2022). Economic policy uncertainty and the US stock market trading: non-ARDL evidence. Future Business Journal, 8(1), 36.‏
  2. Abid, A. (2020). Economic policy uncertainty and exchange rates in emerging markets: Short and long runs evidence. Finance Research Letters, 37, 101378.‏
  3. Amani, R., Ahmadzade, K., & Habibi, F. (2023). Operational Risk, Climate Change, and Economic Growth in Iran. International Journal of New Political Economy.‏
  4. Amiri, H., & Pirdadeh Biranvand, M. (2019). Uncertainty in Iran's economic policies and stock market based on Markov's regime change approach. Financial Knowledge of Securities Analysis, 12(44), 49-67.‏
  5. Arbab, H., Ready, H., & Amini, A. (2021). The uncertainty of economic policies on the efficiency of petrochemical companies in different market conditions. Iran Economic Research, 26(88), 191-221 (In Persian).
  6. Arouri, M., Estay, C., Rault, C., & Roubaud, D. (2016). Economic policy uncertainty and stock markets: Long-run evidence from the US. Finance Research Letters, 18, 136-141.‏
  7. Bacchetta, P., & Van Wincoop, E. (2004). A scapegoat model of exchange-rate fluctuations. American Economic Review, 94(2), 114-118.‏
  8. Asgharian, H., Christiansen, C., & Hou, A. J. (2015). Effects of macroeconomic uncertainty on the stock and bond markets. Finance Research Letters, 13, 10-16.‏
  9. Ashna, M., & LalKhezri, H. (2020). Dynamic correlation between global economic policy uncertainty index and volatility of stock, currency and coin markets in Iran: Application of M-GARRCH model DCC approach. econometric modeling, 5(2), 147-172 (In Persian).
  10. Bakas, D., & Triantafyllou, A. (2018). The impact of uncertainty shocks on the volatility of commodity prices. Journal of International Money and Finance, 87, 96-111.‏
  11. Baker, S. R., Bloom, N., & Davis, S. J. (2016). Measuring economic policy uncertainty. The quarterly journal of economics, 131(4), 1593-1636.‏
  12. Ball, L., Cecchetti, S. G., & Gordon, R. J. (1990). Inflation and uncertainty at short and long horizons. Brookings Papers on Economic Activity, 1990(1), 215-254.‏
  13. Bekiros, S., Gupta, R., & Kyei, C. (2016). On economic uncertainty, stock market predictability and nonlinear spillover effects. The North American journal of economics and finance, 36, 184-191.‏
  14. Berg, K. A., & Mark, N. C. (2018). Measures of global uncertainty and carry-trade excess returns. Journal of International Money and Finance, 88, 212-227.‏
  15. Bernanke, B. S. (1983). Irreversibility, uncertainty, and cyclical investment. The quarterly journal of economics, 98(1), 85-106.‏
  16. Bloom, N. (2009). The impact of uncertainty shocks. econometrica, 77(3), 623-685.‏
  17. Byun, S. J., Jeon, B. H., Min, B., & Yoon, S. J. (2015). The role of the variance premium in Jump-GARCH option pricing models. Journal of Banking & Finance, 59, 38-56.‏
  18. Caldara, D., & Iacoviello, M. (2022). Measuring geopolitical risk. American Economic Review, 112(4), 1194-1225.‏
  19. Carlston, B., & Ochoa, M. (2017). Macroeconomic announcements and investor beliefs at the zero lower bound. Technical report, Working Paper.‏
  20. Carter, C. K., & Kohn, R. (1994). On Gibbs sampling for state space models. Biometrika, 81(3), 541-553.‏
  21. Chen, G. J., & Wang, S. Q. (2016). How does economic policy uncertainty influence corporate investment behavior. Finance and Trade Economics, 5, 5-21.‏
  22. Citci, S. H., & Kaya, H. (2023). Exchange rate uncertainty and the connectedness of inflation. Borsa Istanbul Review, 23(3), 723-735.‏
  23. Cukierman, A. (2008). Inflation, stagflation, relative prices, and imperfect information. Cambridge Books.‏
  24. De Jong, D. J., & De Jonge, V. N. (1995). Dynamics and distribution of microphytobenthic chlorophyll-a in the Western Scheldt estuary (SW Netherlands). Hydrobiologia, 311, 21-30.‏
  25. Del Negro, M., & Otrok, C. (2008). Dynamic factor models with time-varying parameters: measuring changes in international business cycles. FRB of New York Staff Report, (326).‏
  26. Dixit, A. (1989). Intersectoral capital reallocation under price uncertainty. Journal of International Economics, 26(3-4), 309-325.‏
  27. Durbin, J., & Koopman, S. J. (2012). Time series analysis by state space methods (Vol. 38). OUP Oxford.‏
  28. Durbin, J., & Koopman, S. J. (2002). A simple and efficient simulation smoother for state space time series analysis. Biometrika, 89(3), 603-616.‏
  29. Fisher, I. (1930). The theory of interest. New York, 43, 1-19.‏
  30. Fracasso, A., Secchi, A., & Tomasi, C. (2022). Export pricing and exchange rate expectations under uncertainty. Journal of Comparative Economics, 50(1), 135-152.‏
  31. Frühwirth‐Schnatter, S. (1994). Data augmentation and dynamic linear models. Journal of time series analysis, 15(2), 183-202.‏
  32. Gala, V. D., Pagliardi, G., & Zenios, S. A. (2023). Global political risk and international stock returns. Journal of Empirical Finance, 72, 78-102.‏
  33. Giordani, P. E., Schlag, K. H., & Zwart, S. (2010). Decision makers facing uncertainty: Theory versus evidence. Journal of economic psychology, 31(4), 659-675.‏
  34. Jespersen, J. (2009, July). Post-Keynesian economics: uncertainty, effective demand & (un) sustainable development. In Dijon-Conference, Dijon (pp. 10-12).‏
  35. Gkillas, K., Gupta, R., & Vortelinos, D. (2018). Uncertainty and volatility jumps in the pound-dollar exchange rate: evidence from over one century of data (No. 201843).‏
  36. Goudarzi Farahani, Y., Adeli, O. A., Ghorbani, A. (2020). The impact of economic policy uncertainty on exchange rate fluctuations using nonlinear distributed lag model (NARDL) approach. econometric modeling, 5(4), 147-171 (In Persian).
  37. Gujarati, D. (2011). Translator: Hamid Abrishami, Basics of Econometrics, Volume II, Institute of Print and Publications, University of Tehran (In Persian).
  38. Habibi, F., & Amani, R. (2022). The impact of geopolitical risk, world economic policy uncertainty on tourism demand: evidence from Malaysia. Iranian Economic Review, 26(2), 477-488.‏
  39. Harvey, D. (1989). From managerialism to entrepreneurialism: the transformation in urban governance in late capitalism. Geografiska Annaler: series B, human geography, 71(1), 3-17.‏
  40. Heidari, H., Katircioglu, S. T., & Bashiri, S. (2013). Inflation, inflation uncertainty and growth in the Iranian economy: an application of BGARCH-M model with BEKK approach. Journal of Business Economics and Management, 14(5), 819-832 (In Persian).
  41. Hou, X., Wang, T., & Ma, C. (2021). Economic policy uncertainty and corporate fraud. Economic Analysis and Policy, 71, 97-110.‏
  42. Huang, X., & Tauchen, G. (2005). The relative contribution of jumps to total price variance. Journal of financial econometrics, 3(4), 456-499.‏
  43. Huang, Y., & Luk, P. (2020). Measuring economic policy uncertainty in China. China Economic Review, 59, 101367.‏
  44. Huang, Z., Tong, C., Qiu, H., & Shen, Y. (2018). The spillover of macroeconomic uncertainty between the US and China. Economics Letters, 171, 123-127.‏
  45. Huang, Z., Qiu, H., Shen, Y., & Tong, C. (2018). Measuring China’s financial uncertainty: a method based on a large dataset. Journal of Financial Research, 461(11), 30-46.‏
  46. Husted, L., Rogers, J., & Sun, B. (2018). Uncertainty, currency excess returns, and risk reversals. Journal of International Money and Finance, 88, 228-241.‏
  47. Husted, L. F., Rogers, J. H., & Sun, B. (2016). Measuring monetary policy uncertainty: the federal reserve, January 1985-January 2016 (No. 2016-04-11-2). Board of Governors of the Federal Reserve System (US).‏
  48. Iacoviello, M., & Neri, S. (2007). The role of housing collateral in an estimated two-sector model of the US economy. Working Papers in Economics, 412.‏
  49. Jurado, K., Ludvigson, S. C., & Ng, S. (2015). Measuring uncertainty. American Economic Review, 105(3), 1177-1216.‏
  50. Jurado, K., Ludvigson, S. C., & Ng, S. (2015). Measuring uncertainty. American Economic Review, 105(3), 1177-1216.‏
  51. Kamalyan, H., & Davtyan, V. (2022). Exchange Rate Uncertainty and Business Cycle Fluctuations.‏
  52. Khodad Kashi, F., Surrey, A., & Razban, N. (2010). Ministry of Science, Research and Technology, Payame Noor University, Payame Noor University, Tehran Province, Faculty of Economics and Social Sciences (In Persian).
  53. Kim, C. J., & Nelson, C. R. (1999). State-space models with regime switching: classical and Gibbs-sampling approaches with applications. MIT Press Books, 1.‏
  54. Knight, F. H. (1921). Risk, uncertainty and profit (Vol. 31). Houghton Mifflin.‏
  55. Korobilis, D. (2013). Assessing the transmission of monetary policy using time‐varying parameter dynamic factor models. Oxford Bulletin of Economics and Statistics, 75(2), 157-179.‏
  56. Krol, R. (2014). Economic policy uncertainty and exchange rate volatility. International Finance, 17(2), 241-256.‏
  57. Li, X., Su, C. W., Chang, H. L., & Ma, J. (2018). Do short-term international capital movements play a role in exchange rate and stock price transmission mechanism in China?. International Review of Economics & Finance, 57, 15-25.‏
  58. Liu, J. (2021). Impact of uncertainty on foreign exchange market stability: Based on the LT-TVP-VAR model. China Finance Review International, 11(1), 53-72.‏
  59. Ozturk, E. O., & Sheng, X. S. (2018). Measuring global and country-specific uncertainty. Journal of international money and finance, 88, 276-295.‏
  60. Pagliardi, G., Lotfi, S., Paparoditis, E., & Zenios, S. A. (2022). Hedging political risk in international equity portfolios. Available at SSRN 3891070.‏
  61. Qiu, Z., & Liu, Y. (2010). Macroeconomic Uncertainty and Bank Portfolio Behavior: 1995-2009. Journal of Financial Research, 11, 34-44.‏
  62. Rahimian, F., Renani, H. S., & Ghobadi, S. (2022). The Impact of Exchange Rate and Investor Confidence Uncertainty on Monetary and Economic Uncertainty in Iran. Journal of Money and Economy, 17(1), 115-136.‏
  63. Rossi, B., Sekhposyan, T., & Soupre, M. (2016). Understanding the sources of macroeconomic uncertainty.‏
  64. Safdari, M., & Porscheabi, F. (2010). The Effect of Inflation Uncertainty on Iran's Economic Growth Application of VECM and EGARCH Models. Fiscal Monetary Economics, 16(29), 65-87 (In Persian).
  65. Scotti, C. (2016). Surprise and uncertainty indexes: Real-time aggregation of real-activity macro-surprises. Journal of Monetary Economics, 82, 1-19.‏
  66. Sohag, K., Gainetdinova, A., & Mariev, O. (2022). The response of exchange rates to economic policy uncertainty: Evidence from Russia. Borsa Istanbul Review, 22(3), 534-545.‏
  67. Suah, J. L. (2022). Impact of uncertainty and exchange rate shocks: Theory and global empirics. Journal of Asian Economics, 82, 101510.‏
  68. Surrey, A. (2013). Econometrics: with Eviews7 applications.
  69. Wang, B., Li, L., & Hao, D. P. (2019). Monetary policy uncertainty, default risks and macroeconomic fluctuations. Economic Research Journal, 54(3), 119-134.‏
  70. WANG, H., SONG, D., & CHEN, L. (2018). Economic policy uncertainty and stock returns [J]. Quarterly Journal of Finance, 12(4), 1-20.‏
  71. Wang, Y., Wang, L., Pan, C., & Hong, S. (2022). Economic policy uncertainty and price pass-through effect of exchange rate in China. Pacific-Basin Finance Journal, 75, 101844.‏
  72. Wang, Y. Z., & Song, M. (2014). Macroeconomic uncertainty, demand for financing and corporate investment. Res. J, 49(02), 4-17.‏
  73. West, M., & Harrison, J. (2006). Bayesian forecasting and dynamic models. Springer Science & Business Media.‏
  74. Zhu, M. N., & Yan, S. (2015). Dynamic spillovers of economic policy uncertainty and RMB exchange rate. Journal of International Trade, 10, 11
Quarterly Journal of Applied Theories of Economics
Volume 10, Issue 3 - Serial Number 38
December 2023
Pages 67-102

Files

Share

How to cite

Statistics