Managed Floating Exchange Rate Regime and Policy Evaluation for Iran

Abstract

Exchange rate fluctuations have a major role on business cycles. Due to this degree of importance, this paper analyzed the effects of managed floating exchange rate regime on dynamics of some macroeconomics variables of Iran. To do this, we design a dynamic stochastic general equilibrium (DSGE) model for Iran and then using quarterly data over 1989-2016 and Bayesian method, the structural parameters of the model have been estimated. By employing conditional forecasting, our results show that managed floating exchange rate regime, compared with fixed regime, brings more economic growth and at the same time, less speculative activities in money and exchange markets. Moreover, the results from variance decomposition reveal that exchange rate shocks are the most important shock in deriving business cycles and fluctuations of other variables. Based on these finding, we propose policymaker to choose managed floating exchange rate regime as its policy rule.