Impact of Deviation in Foreign Exchange Policies on Support Indices for Iran’s Agricultural

The main goal of this paper is to study the impact of deviation in foreign exchange policies on indices used to measure state support for the agriculture sector (PSE, MPs, CSE, GSSE, and TSE) during 1989-2008 period. To estimate deviation in foreign exchange rate, balanced foreign exchange rate was first studied using vector error correction (VEC) model, and the real foreign exchange rate was also calculated using purchasing power parity (PPP) rate. Then, the impact of deviation in real foreign exchange rate from the balanced rate on the amount of support for agriculture sector was studied for three time periods: 1989-1991 (first period), 1992-2001 (second period), and 2002-2008 (third period). Findings show that firstly, the real foreign exchange rate has deviated from the balanced rate in the studied period and, secondly, that deviation has affected support indices for the agriculture sector.; Findings also show that during the first period, deviation of the real foreign exchange rate from the balanced rate has had the greatest effect compared to other periods on the total support estimate (TSE), so that, during that period, state support for the sector has averaged 2,770 billion rials. In the second period and following changes in the government’s foreign exchange policy from foreign exchange rate stabilization to a multiple rate system, domestic support for agriculture sector decreased by 73 billion rials as a result of foreign exchange policy. In the third period, after foreign exchange policies changed course from a multiple rate system to rate stabilization and floating the foreign exchange rate, total support for agriculture sector increased to 921 billion rials. Based on the research findings, a balanced foreign exchange rate approach can increase international competitiveness of the Iranian agriculture sector.; ;