Analysis of the exchange market pressure in Iran’s economy through the Threshold Vector Autoregressive (TVAR) model approach

The effect of exchange rate fluctuations on domestic prices plays a crucial role in designing and implementing macroeconomic policies. Thus, it is of great importance to discern the exchange market pressure, including the range of changes in foreign reserves and the exchange rates, as a measure to efficiently manage macroeconomics especially for developing economies. The present study aims to investigate and analyze the behavior of exchange market pressure in Iran in 1990-2012. To this goal, the exchange market pressure index has been computed using the procedures proposed by Edwards (2002) and Kumah (2007). With regard to the fact that the exchange market pressure index in Iran is nonlinear, the results of the analysis through the Threshold Vector Autoregressive Model indicate that lagged variables have no significant effect on exchange market pressure when it is in a low regime, but, when the regime shifts towards a high pressure in exchange markets, the index for market exchange pressure increases. The findings also suggest that money growth and inflation have significant effects on exchange market pressure. Therefore, implementing contractionary policies in a monetary system as well as curbing inflation can regulate the pressure of the market exchange.