Economic Strategy

Economic Strategy

The Impact of Uncertainty on the Stability of Iran’s Foreign Exchange Market: Implications for Monetary and Banking Policies

Document Type : Original Article

Authors
Morteza Khorsandi 1
Mohammad Mahdi Khazaei 2
Timour Mohammadi 3
1 Associate Professor Energy Economics Allameh Tabataba’i Tehran Iran
2 PhD Student Theoretical Economics - Monetary Economics Allameh Tabataba’i Tehran Iran
3 Professor Theoretical Economics Allameh Tabataba’i Tehran Iran
10.22034/es.2025.515957.1849
Abstract
The exchange rate is one of the key macroeconomic variables with significant influence on economic developments. This variable is not only affected by fluctuations and economic instability but also influences many macroeconomic indicators. Therefore, managing and optimizing the exchange rate, especially in countries facing substantial external changes, is essential. One of the critical factors contributing to exchange rate instability is macroeconomic uncertainty, which can constrain economic growth by reducing investment and consumption. Identifying and managing economic uncertainties is vital to reducing such fluctuations and strengthening economic stability.
This study aims to construct an index of economic uncertainty and investigate its effect on the exchange rate in Iran’s economy. For this purpose, a macroeconomic uncertainty index was first derived based on a set of economic data for Iran from 1999:Q1 to 2021:Q4. Then, using a dynamic analytical approach that allows for the examination of the effects of uncertainty on the exchange rate over time, the relationships among the variables were analyzed.
The findings indicate that macroeconomic uncertainty shocks (𝑢) can significantly disrupt the stability of the foreign exchange market. In the short term, these shocks have intense effects on exchange rate stability; however, in the medium and long term, the effects diminish and the market exhibits adaptive behavior, though the adjustment is not immediate. In light of these results, economic policymaking in Iran should be revised and strengthened with the aim of reducing macroeconomic uncertainty, increasing transparency and predictability of policies, and establishing mechanisms to stabilize the exchange rate. This issue has been emphasized in Iran’s high-level strategic documents, including the General Policies of the Resistance Economy (2013) and the Five-Year Development Plans. Accordingly, this study, by focusing on the analysis of macroeconomic uncertainty outcomes, provides policy-oriented implications for strengthening monetary and exchange rate policy instruments. These implications can contribute to enhancing the country’s economic resilience, reducing exchange rate volatility, and achieving the goals set out in the resistance economy policies and development programs.
Keywords
Uncertainty
Foreign Exchange Market Stability
Iran
Time Series
Econometrics
Monetary Policy
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  • Receive Date 14 April 2025
  • Revise Date 19 May 2025
  • Accept Date 12 July 2025