Estimating the Export and Import Demand Functions in Iran by using Autoregressive Distributed Lag (ARDL) Cointegration Approach

This paper investigates the effect of national income, exchange rate and relative import prices on the import demand function and also global income, exchange rate and relative export prices on the export demand function for the period (1959-2006) in the Iranian economy. We employed the autoregressive distributive lag (ARDL) model for the estimation of these functions. The empirical results from both ARDL and error-correction models show that national income has had a significant and positive effect, while relative import prices and the exchange rate have had a negative effect on the Iranian import demand function. Through the estimation of the export demand function we found that global income variables and exchange rates have a significant and positive effect and relative export prices have a negative effect on the export demand function in the Iranian economy. Empirical results also show that the speed of adjustment in the Iranian export and import demand functions is relatively high. Finally our empirical findings suggest that the Iranian trade balance improves as the exchange rate, relative import prices and global income increases and as relative export prices decrease.