Inflation and Gap between Official and Market Exchange Rates in Iran
Interdisciplinary Journal of Contemporary Research in Business, Vol. 5, No. 4, August 2013
17 Pages Posted: 22 Apr 2014
Date Written: August 3, 2013
Abstract
Although governments stabilized different exchange rate regimes with respect to their conditions, they have rarely experienced two different of exchanges rates such as official and market exchange rates at a same time. It was experienced in Iran’s economy in 1977-2002 and it made Iran’s economy different from others somewhat. Therefore, this study is an effort to analyze the effect of the gap between official and market exchanges on inflation in Iran.
Two methods were applied in this study and the results are: First, by using IRF in a monetary model augmented, it clears that gap between exchange rates increases inflation sharply in the short time and this positive effect has remained in the long run. It shows that any increase of gap between official and market exchange rates would boost inflation more. Furthermore, this is one of the preconditions to apply the VECM model while existence of the long run cointegration vector, as the second precondition,does not confirm by cointegration Tests. Therefore the VECM is unable to estimate coefficients.
Keywords: Inflation, the gap between official and market exchanges, IRF, VECM
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