The Selection of Appropriate Foreign Exchange Rate Regime for Iranian Economy with Regards to Oil Shocks

The main goal of this paper is to examine an appropriate exchange rate regime in Iran. Most of the studies in Iranian economy have suggested a flexible exchange rate regime with a coordination between monetary and exchange rate policies. In this paper, we test the hypothesis that the managed exchange rate regime is the most appropriate regime for Iran using the Mundell-Fleming Model, and 3SLS method for the period 1974-2001. The estimated macro-econometrics model has been used to simulate the reaction of five exchange rate regimes to oil shocks. The results reveal that the managed exchange rates in terms of trade balance and purchasing power parity are expected to yield a more stable prices and non-oil GDP growth rates. In contrast, a quasi-floating exchange rate regime, in which the exchange rate is determined by the percentage of trade balance deviations, will result in the worst kind of volitility in non-oil GDP and inflation rates at the time of oil shocks.