Purchasing Power Parity and the Iranian Rial: The Effect of Oil Revenue on the Black Market Exchange Rate

This paper examines the relevance of purchasing power parity for the black market exchange rate in Iran in the period of pre-exchange rate reform of 1993. We find evidence supporting the strong version of PPP; the exchange rate, domestic and foreign prices constitute a unit co integrating vector, once we permit an asymmetric long run influence for oil revenue. This particular asymmetry is that the exchange rate is insensitive to oil revenue prior to the revolution, but depreciates if oil revenue rises after the revolution. The asymmetry is explained by the income effects of oil revenue raising imports as the economy stagnated after the revolution; but being met by domestic production in the pre-revolution boom.