Nominal Exchange Rate Misalignment in Iran's Economy

Exchange rate, by influencing areas like: balance of payments, competitiveness, general level of prices, informal economic activities and etc. is considered as one of the most important macroeconomic variables. In this context, assessing the direct and indirect impacts of exchange rate on economic variables and its proper management at equilibrium level, has changed it to one of the challenging points for policy makers. Because a deviation from equilibrium level of exchange rate (known as misalignment) could lead to great macroeconomic fluctuations. This article is to assess this phenomenon (exchange rate misalignment) during 2001-11 in which Iranian authorities implemented the second exchange rate unification policy followed by a hardly managed floating exchange rate approach. For this reason, a basic monetary exchange rate determination model during 1989-2001 was estimated and then it was simulated through real data to estimate equilibrium exchange rate in an ex-post approach. The results imply a great exchange rate misalignment which has been overvalued more than 95% in some periods. These results emphasize moving towards an equilibrium exchange rate. The results also suggest that the price level has had much more impact on exchange rate than national Income and volume of money.