Investigating the Effects of Exchange Rate on the Export of Dairy Products in Iran: Application of Markov Switching Model

Dairy products are one of the most valuable foods that contain almost all the necessary ingredients for the growth and continuation of human life. Among Iran's food products, the dairy products occupy the first place in exports and play an important role in the country's foreign exchange. Iran has a self-sufficiency of about one hundred percent in milk and that is why the government and the dairy sector tend to aim at exporting milk to other countries. Iran is a young player in dairy exports but has already reached an annual export level of 600,000 tons of dairy products. The country aims to be a regional key player in the dairy exports. This requires top quality milk and techniques. Finding markets for export is a big challenge for the government. A good condition for export over large distances would be the dairy products with internationally recognized brand names. This study aimed at investigating the impact of effective exchange rate on the export of Iranian dairy products. For this purpose, firstly, the current conditions of dairy products export as well as the effective exchange rate fluctuations during 1991-2021 were identified as the factors affecting the export development. Then, these factors were tested using the Markov switching model. After performing the static test, the Hodrick-Prescott filter was used to examine currency shocks and the production gap. The study findings showed that the variables of real exchange rate and domestic production of milk positively and inflation negatively affected the export of dairy products; the real effective exchange rate in both regimes had a positive and significant impact on the export value of the dairy products; in addition, in both regimes, the domestic milk production had a positive and significant effect on the model, while the inflation in the both regimes of the estimated model had a negative but significant impact on the dairy exports. The way of managing Iran's economy, the characteristics of policy making, the commercial influence on the supply and demand of currency through export and import as well as the management of the currency market by the government and the central bank, according to the fundamental changes in these two institutions, have all had a significant impact on the behavior of the exchange rate in the country. Therefore, according to the concerned results, an increase in the real exchange rate could lead to an increase in the export of dairy products. Although in the current situation, one of the main drivers of the government to increase imports and exports is to stabilize the exchange rate, but due to the different effects of exchange rate changes on different products, it is recommended that the real exchange rate calculated in this study be used to evaluate some economic policies such as agricultural policies.