Affecting Factors on Exchange Market Pressure in Iran by the Markov Switching Model with Time Varying Transition Probability

The main purpose of this study was to investigate the factors affecting on exchange market pressure in Iran's economy. For this purpose, we used Markov switching model with time varying transition probability. At first we estimated behavior of exchange rate using single variable markov swiching model with fixed transmission probability during the period of time 1984-2014 and then analyzed affecting factors on exchange market pressure within framework of possibility of changing transfers during time.
Results shows that behavior of exchange rate within framework of two regimes of appreciation and depreciation of currency with high and low volatility can be assessed, and foreign exchange reserves of Central Bank, inflation rate and oil revenues are effective variables on exchange market pressure in Iran's economy. In this sense that changes of exchange reserves with probability of staying in depreciation regime of national currency value and increasing probability of transition from appreciation regime to depreciation regime. Increase in inflation increases the probability of staying in depreciation regime and transition from appreciation regime to depreciation regime. i.e with increasing of inflation, value of national currency is reduced and pressure added on exchange market. Also results shows that increasing of oil exports lead to increase Central Bank intervention in exchange market and and increase transition probability of appreciation regime and reduce the burden of exchange rate.