The Effect of Exchange Rate on the Iran's Pharmaceutical Industry Balance: Vector error Correction Approach

The effect of exchange rate fluctuations on the balance of payments is very important in economic literature. Pharmaceutical is one of the sub-sections of the balance of payments.
By using vector error correction model, this paper seeks to identify the effect of exchange rate changes on the balance of payments by evaluation the existence of J-Curve in Pharmaceutical industry over the period of 1991 to 2012.
The results show the existence of J curve in IransPharmaceutical industrybalance of payments. It means that exchange rate appreciation has reduced Pharmaceutical industrybalance of payments in the first period but after a period it has increased Pharmaceutical industry revenues and improved its balance of payments. According to the analysis of variances of export and import functions the pharmaceuticalindustryhas highly been affected bychanges in exchange rate. 0.19 And 0.016 Changes in these functions have been caused by exchange rate changesand the balance of payments is more sensitive to changes inforeign income.The rate of effectiveness of the income variation is 0.25.
The increase in the exchange rate has improved the pharmaceutical industry trade balance of the country in the last periods of shocks. Also, changes in gross domestic product have had the greatest impact on the fluctuation of Iran's pharmaceutical trade balance.