Estimating the reaction function of the central bank of Iran intervention policy in the country foreign exchange market

SaadatNezhad, AbdolHamid; Tabatabaienasab, طباطبائی نسب; Abtahi, SeyedYahya; DehghanTafti, MohamadAli

doi:10.22034/es.2022.144755

Estimating the reaction function of the central bank of Iran intervention policy in the country foreign exchange market

Document Type : Original Article

Authors

¹ Management and Economy Faculty, Yazd University, Yazd,Iran

² Assistant Professor, Department of Economics, Yazd Branch, Islamic Azad University, Yazd, Iran (Corresponding Author)

³ Economic Group, Accounting Management and Economic Faculty, Yazd Islamic Azad University,Yazd,Iran

⁴ Economic Group, Accounting, Management and Economic Faculty, Yazd Islamic Azad University,Yazd, Iran

10.22034/es.2022.144755

Abstract

The purpose of this paper is to estimate the response function of the central bank intervention policy based on the theory of Weimark (1995). For this purpose, first the central bank intervention index was calculated with the foreign exchange market pressure approach and then the reaction function of the intervention policy with the threshold approach (STAR) was estimated based on quarterly data for the years 1370-1397. The results of estimating the linear part of the model show that the variable of exchange rate deviations from the long-run path has a negative effect on the central bank intervention index. the results of estimating the nonlinear part of the model indicate the positive effect of long-term exchange rate deviations and the growth rate of foreign exchange earnings from oil sales on the intervention of the Central Bank in Iran. This indicates that as the government's foreign exchange earnings increase, so does the growth of the central bank's foreign exchange reserves. the government provides more foreign currency to the central bank in order to exchange it in rials, and the central bank has to add these amounts to its foreign exchange reserves. In fact, in Iran, due to high inflation, governments have always tried to keep the exchange rate low to prevent price increases. The result of this type of intervention has been the inflexibility of the nominal exchange rate in response to economic changes and developments, which can be a factor in reducing the real exchange rate in recent decades in Iran.

Keywords

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Volume 11, Issue 40 - Serial Number 40
July 2022
Pages 103-144

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Estimating the reaction function of the central bank of Iran intervention policy in the country foreign exchange market

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Volume 11, Issue 40 - Serial Number 40
July 2022
Pages 103-144

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Estimating the reaction function of the central bank of Iran intervention policy in the country foreign exchange market

References

Volume 11, Issue 40 - Serial Number 40July 2022Pages 103-144

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Volume 11, Issue 40 - Serial Number 40
July 2022
Pages 103-144