Exchange Rate from Equilibrium Career and Efficacy on the Business Cycles in Iran

Since the exchange rate and its misalignment the most important factors affecting macroeconomic variables of each country, business cycles’ fluctuation state would have also impacts on economic policy implementation. In this paper we showed the exchange rate deviation from equilibrium and studied its effect on business cycles in Iran economy. In order to achieve this aim, we used time series data of 1973- 2008 for measuring long-term and short term relationships between exchange rate deviation and business cycles using auto-regressive extensive Lags model (ARDL). We adopted Hodrick-Presscott (HP) filter for computed Business cycle indicator. After confirming long-term relationship, results imply that the exchange rate deviation is effective on business cycles in Iran economy so that an increased exchange rate deviation can cause more fluctuations in business cycles. The coefficient of error correction (ECM) obtained in this model suggested that41percent of imbalance during each period is modulated in business cycle standing to its long-term process.