Macroeconomic Uncertainty, Political Risk and Exchange Rate Market Fluctuations in Iran

One of the most vital concerns of economists and policymakers is finding the root of economic fluctuations and minimizing them. The political situation in Iran, the existence of economic sanctions, and uncertainty in the economy have caused severe fluctuations in the exchange rate market during the last few decades. The main goal of this research is to investigate the effect of macroeconomic uncertainty and political risk on the fluctuations of the foreign exchange market in Iran from 1991 to 2020 using the vector autoregression method with time-varying parameters (TVP-VAR). To achieve this goal, the macroeconomic uncertainty index was first measured using seven economic sectors, including production, energy, price, monetary and credit variables, currency and foreign trade, and financial and stock market variables. The results of this research indicate an increasing and very strong effect of the macroeconomic uncertainty index on exchange rate fluctuations in Iran. On the other hand, political risk has had an increasing effect on exchange rate fluctuations in Iran, except during the nuclear agreement period (2014 - 2017). Moreover, other results of the research indicate the increasing and very strong effect of housing price fluctuations and gold price fluctuations on exchange rate fluctuations in Iran, while stock market fluctuations have a decreasing effect on currency market fluctuations in Iran.