The Evaluation of Currency Crises in the Iranian Economy (Early Warning System Approach)

Document Type : Research Paper

Authors

1 Researcher of monetary and foreign exchange group, Monetary and Banking Research Institute of Central Bank of Iran.

2 Assistant professor,Research Center of Strategic Studies, judicial research institute, Tehran, Iran.

Abstract

Although currency crises evidently Valy based on size and durability in Iran and developing economies, the crises are similarly influenced by the national and international variables through the channel of foreign exchange market misalignements and BOP unsustainability. In this context, we aim to predict currency crises in Iranian economy. Meanwhile, Lasso Regression Method is applied to evaluate the impact of real sector, monetary and external sectors variables on the currency crises respectively two, one, and the same season of the crises incidence. The results underscore the role of the similar indicators to explain currency crises in Iran. The key indicators, which are empirically recognized, are comprised of the net gross domestic saving, and deficit of banks cash flows in the context of a transmission process that sequentially affects the growth of money base, excess aggregate demand, prices growth, net financial-capital transactions as well as the reduction in the disposable international reserves. The transmission process causes the foreign exchange rate deviations from the PPP and UIP rates. The estimation results also underline the likelihood of the EWS to predict the four currency crises in Iran, which respectively encompass the third quarter of 1372, third quarter of 1377, fourth quarter of 1379, and the second quarter of 1390. Moreover, all four-currency crises are evidently influenced by the external indicators (sanctions, and international oil price shocks) and domestic macroeconomic imbalances that periodically accelerated the unsustainability of foreign exchange market and BOP over the past three decades.

Keywords

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History

  • Receive Date: 21 October 2020
  • Revise Date: 29 November 2020
  • Accept Date: 07 December 2020

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