The Relationship between Uncertainty of Money Market and Exchange Rate Market with Economic Instability in Iran

Economic stability is important for economic performance and achieving sustainable economic growth. One concept related to the subject of economic instability is uncertainty and fluctuations in macroeconomic variables. Uncertainty in the money and exchange markets may cause fluctuations in other markets and affect the result of policies toward economic stability. In this study, output and inflation variability are used as measures of economic instability. Additionally, uncertainty of money and foreign exchange markets are obtained as volatilities of liquidity volume and exchange rate using the GARCH model. Finally, the relationship between volatilities of money and exchange rate market and economic instability index has been estimated during the period of the first quarter of 1990 to the fourth quarter of 2021, using the dynamic conditional correlation model. The results indicate that over time, the correlation between exchange rate volatilities and inflation variability is often positive, although the coefficient of this relationship varies in some periods. Furthermore, the volatilities of liquidity volume in the long term are associated with economic instability from both production and inflation aspects. Therefore, reducing macroeconomic instability caused by variability of inflation and production requires addressing uncertainty and fluctuations in the exchange market and implementing appropriate monetary policy shocks