The Effect of Oil Price Shocks on the Exchange Rate in Iran, Using the Markov-Switching Approach

This research analyzes how changes in oil supply, global demand, and oil prices have impacted Iran’s real exchange rate in dollars. Monthly statistics were utilized from April 1990 to September 2015. Using a structural vector autoregression model, triple oil shocks were first derived. Then, the impact of shocks on the exchange rate was examined using a two-regime Markov-switching model within this period. The obtained results indicate that the real exchange rate in Iran frequently experiences low volatility (the second regime) and the exchange market was predominantly in a state of stagnation. Therefore, the effect of oil shocks in the second regime is highly significant. The real exchange rate is largely and negatively affected by oil price shocks and global demand shocks in this regime, i.e., the favorable global demand shock caused by the global economic expansion. The increase in the price of oil causes a decline in the exchange rate and a rise in the value of Iran’s national currency, resulting in the Dutch disease in the Iranian economy. According to the findings, the global oil supply shock has no significant impact on the exchange rate and, as a result, does not affect the Iranian exchange market significantly.