A Study of the Real Exchange Rate Behavior and its Effects on Macroeconomic Variables

In this article, real exchange rate behavior and its effects on macroeconomic variables are studied by explaining two models; impulse function and forecasting predicted error decomposition. Studies show that high artificial currency value has caused domestic and foreign accounts equilibrium disturbance and foreign income decrease due to the slackening of commercial and agricultural activities, foreign debt increase, productive capacity, purchasing power, and national welfare decrease, and general price level increase. Trade balance unexpected reaction is one of the most important points that should be considered while first fostering exchange policy. At the first stage of fostering devaluation policy, contrary to the perspective, trade balance may move into a critical situation. The results show that in Iran’s Economy, the effect of Rial real devaluation policy, after three lags (about a year), caused non- oil export growth and improvement. It should be considered that the positive range of this effect was restricted and lasted for no more than one year. This study approves the presence of J- curve phenomenon in Iran from the first quarter of 1977 till the last quarter of 1995. The results show the importance of import share in changing real exchange rate. Short term production changes are affected by output, import, money supply, real effective exchange rate and non-oil – export respectively. The results also exhibit that two variables – money supply and imports, significantly explain changes in non-oil – exports. Production equation is also affected by its own lags. This means that in the above-mentioned period, exchange and monetary policy could not play an important role in output changes. Ultimately, in the import equation, import is affected weekly by the lags of real exchange rate. It might be explained that during the period of this study, import restrictions as the dominating variable, played the key role of import trend in Iran.