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Darabi M, Hemmati A, Rahmani T, Morovati M. Choosing base year in relative purchasing power parity theory to determine the long-run trend of exchange rate in Iran. J. Mon. Ec. 2023; 18 (1) : 4
URL: http://jme.mbri.ac.ir/article-1-615-en.html
Choosing base year in relative purchasing power parity theory to determine the long-run trend of exchange rate in Iran
Mehdi Darabi1 , Abdolnaser Hemmati1 , Teymur Rahmani *1 , Mohammad Morovati2
1- University of Tehran, Faculty of Economics
2- Khatam University, Department of Economics
Abstract:   (374 Views)
The theory of relative purchasing power parity to determine the long-run trend of the exchange rate in Iran is quite sensitive to the base year selection. So, by changing the base year, trends with a level difference of several hundred percent are obtained. It means that the long-run trend of the real exchange rate is not at a constant level. In other words, contrary to the PPP theory, the real exchange rate trend is not stationary. Empirical studies consider the non-stationary change in terms of trade resulting from the changes in the real oil price as one of the reasons. This study examines the nexus between the real exchange rate and terms of trade in Iran from 1960 to 2020, using the autoregressive distributed lag approach to cointegration as the estimation method. We find that higher terms of trade lead to a decline in the actual exchange rate and vice versa. The results indicate a long-run relationship, which means that the condition needed to estimate the long-term trend of the exchange rate in Iran is to have the same terms of trade in the base year.
Article number: 4
Keywords: Exchange rate determination, Terms of trade, Oil price, Bound test.
Full-Text [PDF 1189 kb]   (434 Downloads)    
Type of Study: Original Research - Empirical | Subject: Macroeconomics
Received: 5 Dec 2022 | Accepted: 12 Sep 2023 | Published: 29 Apr 2024
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