Based on currency models available in economic studies and global experiences, the exchange rate can be considered one of the key economic variables, especially in Iran, whose fluctuations are more important to the public than any other variable, and for this reason, the issue of government intervention becomes important, economist Mohammad Reza Monjazab prefaced an article for the Persian newspaper Ta’adol with this note. A translation of the text follows:
Wide-Ranging Effects
Exchange rate fluctuations have significant impacts on the interest rate of short- and long-term deposits, trade balance and many economic variables. Checking this variable is of great importance to maintain the value of money and accelerate economic growth. These fluctuations have different effects on the domestic and foreign economic sectors, which can affect the economy as a whole. Therefore, exchange rate fluctuations, which are considered one of the challenging variables of economic stability, have attracted the attention of economists and policymakers of developed and developing countries.
Investigating the variability of the exchange rate and factors influencing it in different periods provides valuable information to politicians and economists. Different countries have different reactions to exchange rate changes, according to their level of development. Exchange rate changes affect export and import activities. The increase in exchange rate raises the competitive power and balances the foreign trade sector. The exchange rate is one of the important parameters for assessing the state of the economy, along with the variables of economic growth, inflation and unemployment.
Supply-Demand Variable
This variable is affected by domestic and foreign economic policies and developments, and is the source of changes in macroeconomic variables such as inflation, economic growth, export, import, etc.
If foreign currency is considered an important indicator, it is clearly evident that the exchange rate is determined based on supply and demand; in other words, this rate is nothing but the intersection of these two factors.
Supply and demand are the result of any action that creates a right for us compared to other countries or vice versa; in this note I will discuss and examine factors such as inflation rate, interest rate, liquidity and the most important index: the intervention index.
Due to the turbulence of foreign exchange market in Iran's economy, the exchange rate and its changes are issues of concern for many economists and policymakers. In most studies, the influence and intervention of CBI through monetary and financial instruments, as well as determining effective factors in the instability of exchange rate, have been investigated separately, but the influence of CBI intervention in the instability of the exchange rate has not been heeded. As a result, considering the importance of exchange rate instability as well as the intervention of the Central Bank of Iran, we should seek to provide a model to investigate the factors influencing the exchange rate instability in Iran.
Exchange rate volatility increases less in higher deciles than in lower deciles. In total, the intervention index of CBI has a positive and significant effect on the instability of the exchange rate with a coefficient of 4,000%. The obtained result complies with theoretical foundations.
Regarding the real interest rate, the effectiveness of exchange rate instability is higher than this index in the initial and middle deciles, and the effect of this index on exchange rate instability declines, so that with the increase of deciles, the effectiveness of exchange rate instability of this index decreases.
In general, the real interest rate with a factor of 3,000% has had a negative and significant effect on the instability of exchange rate. The result is also in accordance with theoretical foundations. But what makes this amount of currency fluctuation evident in Iran’s economy?
A Multi-Rate System
After the 1979 Islamic Revolution, Iran's foreign exchange market has experienced a multi-rate system until the unification of the exchange rate and the determination of the exchange rate based on the managed floating exchange rate system.
Until the fiscal 2001-2, there was a dual exchange rate system in Iran's economy (a fixed official exchange rate in addition to an unofficial exchange rate). Since 2001, with the implementation of the exchange rate unification policy, Iran's currency system was changed to a managed floating currency system.
With the widening of the gap between the official and unofficial exchange rates, from the second half of the fiscal 2010-11, Iran's economy returned to a fixed exchange rate system. The difference between the reference rate and the free market in the fiscal 2011-12 and 2012-13 led to currency fluctuations and the economy faced many problems.
From the fiscal 1974-75 to 1976-77, the Central Bank of Iran's involvement in the currency market was decreasing, and after that, until the Islamic Revolution, this trend increased, which shows that the fixed exchange rate system had been established in the market.
After the Islamic Revolution in the fiscal 1978-79 till 2001-02, the trend of CBI involvement was in the range of zero, which shows the implementation of a floating currency system in the currency market. But from the fiscal 2001-02 till 2003-04, the value of this index approached the range of one, which is a sign of the change of the currency system to a fixed currency system.
From the fiscal 2004-05 to 2012-13, the involvement of CBI in the foreign exchange market decreased, but since the fiscal 2012-13, this trend has changed and CBI implemented a managed floating currency system.
Based on these figures, the more the CBI involvement increased in the currency market, the more the indicators fluctuated; as more attention is paid to market realities, the more stable the exchange rate became.
