An Investigation of the Asymmetric Effects of Real Exchange Rate Volatility on Iran's Private Consumption: Nonlinear ARDL Approach

The adoption of appropriate foreign exchange policies has always been one of the main issues in the developing countries, including Iran. The exchange rate volatility plays a key role in the economic performance. The consumption sector as one of the components of total demand is one of the key sectors in the economy that affects the exchange rate and its fluctuations. Therefore, the main purpose of this paper is to identify the main factors influencing on private consumption with the emphasis on exchange rate volatility and its asymmetry effects. To do it, firstly, real exchange rate volatility is estimated by IGARCH model and then it is decomposed for positive and negative shocks. Finally, the asymmetric effects of positive and negative shocks of exchange rate volatilities on private consumption behavior are estimated using the nonlinear ARDL model during the period 1960-2016.
In general, the results show that private consumption behavior is a function of fluctuations and uncertainties of exchange rate, rather than being influenced by the absolute level of the real exchange rate. Also the level of real exchange rate volatility (decreasing and increasing) also has a different effect on private consumption. The findings show that effect of positive and negative shocks of real exchange rate on the private sector consumption is symmetric in the short run but is asymmetric in the long run. Also, national income and inflation have a positive and negative effect on the consumption of the private sector, respectively. Therefore, the controlling the volatility of the real exchange rate rather than its absolute level targeting is the policy recommendation of this study for policy makers.