Investigation and Analysis of Iran's Trade Balance Reaction to Exchange Rate Changes: A Time Varying Parameter Approach

Given the importance of identifying the relationship between exchange rate and trade balance in adoption of appropriate economic adjustment policies and the requirement of accurate estimation of elasticity of trade balance to income and price changes for proper timing of such policies، in this study the effect of domestic and foreign income and real exchange rates on the Iranian trade balance has been investigated. Moreover، the reactions of trade balance to changes in the variables of interest have been estimated using time varying parameter models over the period of 1338-1389. The results show that the coefficients of the estimated model are not constant over the time and they are influenced by structural changes such as: oil price shocks، economic policies and exogenous shocks such as the imposed war and the Islamic revolution. By comparing the price elasticity of the balance of trade and the real exchange rate، it can be seen that by increasing real exchange rates during the period of 47-50 and 56-67، the price elasticity is positive and becomes negative when real exchange rates reduce.