## _wp07113

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---

### Introduction and key hypotheses
- Examines how exchange rate fluctuations affect real activity through demand- and supply-side channels.
- Demand-side channels:
  - Devaluation/depreciation could boost domestic production by stimulating net exports.
  - Devaluation could lower consumption via income redistribution from workers to producers (Alexander (1952)).
- Supply-side channels:
  - Depreciation raises costs of imported inputs, increasing production costs and potentially curtailing aggregate supply.
  - If supply reduction outweighs demand stimulus, depreciation can be contractionary.
- The paper contrasts contractionary versus expansionary effects of depreciation and notes the role of exchange rate regime when demand and supply shocks impinge on the economy (see Beidas and Kandil (2005)).

### Empirical approaches in the literature
- Four broad approaches summarized:
  - Before-after approach (examples: Cooper (1971), Krueger (1978), Edwards (1989a)).
  - Group approach comparing devaluing countries to non-devaluing groups (examples: Donovan (1982), Gylfason (1987), Kamin (1988), Edwards (1989b)).
  - Macro-simulation approach that imposes a shock to the exchange rate and simulates model responses (examples: Agenor (1991); Krugman and Taylor (1978); Gylfason and Shmid (1983); Gylfason and Risager (1984); Solimano (1986); Barbone and Rivera-Batiz (1987); Taye (1999)).
  - Econometric estimation using cross-sectional, panel, or time-series data (examples listed in the source).
- For a comprehensive review see Bahmani-Oskooee and Miteza (2003).

### Considerations specific to oil-producing countries (and Iran)
- Prior literature often excludes oil-producing countries (especially OPEC members) because:
  - Oil dominates output supply.
  - Oil decisions are capacity- or coordination-constrained.
  - Oil is priced in foreign currency.
  - Many oil producers peg exchange rates to stabilize oil export proceeds.
- Despite oil dominance, depreciation can be contractionary in oil producers due to higher costs of imported inputs; empirical evidence for Iran (1959–1990) shows depreciation could be contractionary (Bahmani-Oskooee (1996)).
- Iran has undertaken diversification and promotion of non-oil exports, changing the responsiveness of non-oil output to exchange rate movements.

### Trends in Iran’s non-oil exports and implications
- Historical ratios and observations:
  - Nonoil exports as a percent of total exports was little over 3% in 1979.
  - In 2000, non-oil exports stood at almost 27% of total exports.
  - Authors suspect the ratio has increased to, perhaps, 40% in more recent years.
- Empirical observation:
  - The ratio of non-oil exports to total exports increased rapidly in the mid-1980s (during the Iran–Iraq war), attributed to government investment in strategic sectors including petrochemical industry.
  - Petrochemical exports from state-owned enterprises account for a large share of non-oil exports.
  - The surge in the non-oil exports/total exports ratio does not appear to be dependent on the oil price; correlation coefficient between the ratio and the oil price is -0.09 (statistically insignificant).
- Figure 1 (described):
  - Plots RATIO (nonoil/total exports), OILPN (price per barrel of crude oil), and OILPI (oil price index scaled from zero to one).
  - Shows clear increase in relative importance of non-oil exports, with momentum mostly during the 1990s.

### Data notes and composition of non-oil exports
- Non-oil exports list includes: carpets, fresh and dried fruits, pistachio, raisins, all kinds of skin and leather, caviar, casings, gum tragacanth, cumin, cotton, metallic mineral ores, detergents and soaps, chemical products, footwear, ready-made clothes, fabric, cement, stones and construction materials, transportation vehicles and their spare parts, aluminum and articles thereof, copper and copper bar, cast iron, iron and steel, and others.
- Data for Figure 1 comes from source c cited in the appendix.

### Study objective and empirical strategy
- Aim: contrast effects of exchange rate fluctuations on real output growth in Iran over two sample periods:
  - A period that excludes the recent surge in non-oil exports.
  - A longer sample period including the 1990s surge in non-oil exports.
- Objective: test empirically whether increased non-oil export share altered the impact of depreciation.

### II. The model and the method
- Empirical model replicates reduced-form solution of Kandil and Mirzaie (2002), linking Ln GDP to:
  - Ln M (log of money supply, M2),
  - Ln G (real government spending),
  - Ln RE (various measures of real exchange rate).
- Long-run specification:
  - LnGDPt = a + b LnMt + c LnGt + d LnREt + εt
- Short-run dynamics:
  - Modeled in an error-correction / distributed-lag format including lagged differences of Ln GDP, Ln M, Ln G, and Ln RE and an error-correction term embedding the long-run relation.
- Cointegration testing:
  - Uses Pesaran et al. (2001) bounds-testing approach (F test for joint significance of lagged level variables).
  - Upper bound critical value of the F-test at the 5% level is 4.01 (10% level is 3.52).
  - A calculated F-statistic greater than the upper bound signals cointegration.
- Exchange rate measures:
  - Bilateral rial-dollar real parallel rate (RE) — increase indicates depreciation (more rials per US dollar).
  - Bilateral rial-dollar nominal parallel rate (NE).
  - Real effective exchange rate (REFEC) and nominal effective exchange rate (NEFEC) constructed as weighted averages across 21 trading partners (weights λj, ∑λj = 1). An increase in REFEC reflects a real appreciation of the rial.
- Expectations decomposition:
  - Anticipated component: fitted values from a 4-lag regression (adaptive expectations).
  - Unanticipated component: residuals from that regression.
- Data and sample:
  - Annual data 1959–2003 (effective rates: 1966–2003; estimation effectively 1970–2003 with maximum lag).
  - Key data sources: International Financial Statistics (IMF), Direction of Trade Statistics (IMF), Central Bank of Iran, Bahmani-Oskooee (2005), World Economic Outlook.
  - Variable definitions: GDP (real, CPI-deflated), M2, G, NE, RE, REFEC, NEFEC (see Appendix I).

### III. Empirical results — main findings

A. Basic model: bilateral real parallel exchange rate (Table 1)
- Short-run findings:
  - Monetary growth (∆Ln M) stimulates real output growth in both 1959–90 and 1959–2003 samples (examples: ∆Ln Mt = 1.12 (2.53) for 1959–90; 0.98 (4.27) for 1959–2003).
  - Government spending (∆Ln G) is a major short-run determinant in both periods (e.g., ∆Ln Gt = 0.35 (2.17) for 1959–90; 0.37 (3.32) for 1959–2003).
  - Short-run fluctuations in the real parallel dollar price are insignificant in 1959–90 but negative and significant over 1959–2003 (transitory depreciation shrinks output).
- Long-run findings:
  - 1959–90: Ln RE = -3.23 (0.29) — statistically insignificant in the shorter sample.
  - 1959–2003: Ln RE = 1.05 (2.51) — positive and highly significant over the extended sample; persistent real depreciation is expansionary.
- Cointegration and adjustment:
  - F-statistics exceed Pesaran et al. upper bound for both samples (upper bound at 5% = 4.01), supporting cointegration.
  - ECMt-1: -0.24 (2.79) significant for 1959–2003 (not significant in 1959–90), indicating convergence toward long-run equilibrium in extended sample.
- Intercept:
  - Estimated long-run intercept for 1959–2003 is -7.32 (1.95), indicating that absent policy and exchange-rate effects real growth would be negative.

B. Bilateral nominal parallel exchange rate (Table 2)
- Short-run:
  - Procyclical fiscal and monetary policies remain significant determinants.
  - Depreciation in the parallel market (∆Ln NE) has a positive short-run effect in both 1959–1990 and 1959–2003 (e.g., ∆Ln NE t coefficient 0.08 (4.21) in 1959–2003).
- Long-run:
  - 1959–1990: Ln NE = 2.50 (0.89) — not significant in the shorter sample.
  - 1959–2003: Ln NE = 0.15 (8.55) — positive and highly significant.
  - Monetary policy long-run effect: Ln M = 0.49 (3.90) in 1959–2003.
- Diagnostics:
  - ECMt-1 = -0.58 (4.69) for 1959–2003 (significant), indicating adjustment to equilibrium.

C. Effective exchange rates (Table 4; sample 1966–2003 / estimation 1970–2003)
- Short-run:
  - Monetary and fiscal policies are important short-run determinants; lagged real output shows persistence.
  - Appreciation of the effective exchange rate (real or nominal) has a positive short-run effect on real output (cheaper intermediate imports): ∆Ln EX t = -0.17 (2.45) for real EX with positive lagged effects; nominal EX ∆Ln EX t = -0.09 (2.34) with ∆Ln EX t-1 = 0.06 (1.43).
- Long-run:
  - Real effective exchange rate: Ln EX = -1.19 (5.69) — negative and significant (appreciation contractionary in the long run).
  - Nominal effective exchange rate: Ln EX = -0.13 (25.4) — negative and significant.
  - Government spending long-run coefficients: Ln G = 0.57 (4.71) for real EX model; Ln G = 0.47 (16.9) for nominal EX model.
  - Monetary policy long-run: Ln M = -0.11 (0.67) (insignificant) in real EX model; Ln M = 0.35 (10.5) (significant) in nominal EX model.
- Cointegration and adjustment:
  - Adjusted R2: 0.84 (real EX) and 0.90 (nominal EX).
  - F-statistics: 10.33 (real EX) and 19.62 (nominal EX) — both exceed upper bound.
  - ECMt-1: -0.63 (4.45) (real EX) and -1.62 (9.46) (nominal EX) — both significant.

D. Anticipated vs. unanticipated exchange rate components
- Bilateral rial/dollar decomposition (Table 5; sample 1959–2003):
  - Short-run:
    - Procyclical monetary and fiscal short-run effects persist.
    - Significant short-run effects on real growth are attributed to the anticipated component only (∆Ln EX t for anticipated real bilateral = 0.13 (2.22); unanticipated component insignificant).
  - Long-run:
    - Anticipated depreciation (real and nominal bilateral) has a positive significant long-run effect (e.g., Ln EX for anticipated nominal bilateral = 0.12 (8.25)).
    - Unanticipated bilateral exchange rate shocks are insignificant in the long-run.
  - ECMt-1: negative and significant for anticipated components (e.g., -0.66 (4.57) for anticipated nominal bilateral), not significant for unanticipated components.
- Effective exchange rate decomposition (Table 6; sample 1966–2003):
  - Short-run:
    - Anticipated appreciation of the effective exchange rate stimulates short-run real output growth (via cheaper imported inputs and lagged effects); unanticipated fluctuations are insignificant in the short-run.
  - Long-run:
    - Anticipated persistent appreciation decreases real output growth significantly (Ln EX for anticipated real effective = -1.25 (4.52); for anticipated nominal effective = -0.14 (9.37)).
    - Unanticipated effective exchange rate shocks are insignificant in the long-run.
  - ECMt-1: significant and negative for anticipated effective rate models (e.g., -0.53 (3.63) and -1.02 (5.34)), insignificant for unanticipated models.

### IV. Summary of empirical conclusions
- Exchange rate effects are sample-dependent:
  - 1959–1990: no evidence of cointegration between output growth and the parallel rial-dollar exchange rate.
  - 1959–2003: cointegration is strong and persistent depreciation of the rial in the parallel market is expansionary in both short and long run.
- Effective exchange rate evidence:
  - Currency appreciation is expansionary in the short run (cheaper imported inputs) but contractionary in the long run (loss of competitiveness). Long-run negative coefficients are observed for REFEC and NEFEC.
- Expectations matter:
  - Anticipated exchange rate movements have significant effects on output (anticipated depreciation of the rial in the parallel market boosts output; anticipated appreciation of the effective rate reduces long-run output).
  - Unanticipated exchange rate shocks are generally insignificant in both short and long run.
- Monetary and fiscal policies:
  - Both policies are procyclical and significant determinants of real output growth in the short run across specifications.
  - Long-run non-neutrality of monetary policy is evident in some specifications (e.g., nominal effective rate models), consistent with wage/price rigidity and the role of oil-related monetary/fiscal expansions.

### Policy recommendations
- Maintain a higher degree of exchange rate flexibility as oil-producing economies diversify exports.
- Exchange rate flexibility need not imply abandoning a peg; gradual and managed flexibility geared toward stabilizing the real effective exchange rate is recommended.
- Manage exchange rate policy mindful of both demand and supply channels and agents’ expectations:
  - Anticipated movements affect supply decisions and competitiveness; managing expectations is important.
  - Rapid policy responses to unanticipated shocks are less critical given their transitory and typically insignificant long-run impact.

### Key numerical highlights (preserving reported values)
- Pesaran et al. (2001) upper bound F-test critical value at 5%: 4.01 (10%: 3.52).
- Table 1 long-run Ln RE coefficients:
  - 1959–90: Ln RE = -3.23 (0.29).
  - 1959–2003: Ln RE = 1.05 (2.51).
- Table 2 long-run Ln NE (1959–2003): Ln NE = 0.15 (8.55); ECMt-1 = -0.58 (4.69).
- Table 4 long-run REFEC / NEFEC coefficients:
  - Real Effective Rate: Ln EX = -1.19 (5.69); ECMt-1 = -0.63 (4.45); F = 10.33; Adjusted R2 = 0.84.
  - Nominal Effective Rate: Ln EX = -0.13 (25.4); ECMt-1 = -1.62 (9.46); F = 19.62; Adjusted R2 = 0.90.
- Table 5 anticipated bilateral nominal long-run: Ln EX = 0.12 (8.25); ECMt-1 = -0.66 (4.57).
- Table 6 anticipated effective long-run:
  - Anticipated real EX: Ln EX = -1.25 (4.52); ECMt-1 = -0.53 (3.63); F = 10.77; Adjusted R2 = 0.84.
  - Anticipated nominal EX: Ln EX = -0.14 (9.37); ECMt-1 = -1.02 (5.34); F = 8.42; Adjusted R2 = 0.85.
- Trade concentration: 21 major trading partners constitute almost 70% of Iranian trade (Table 3 trade figures reported in millions of US dollars for 2003).

*Source: _wp07113 — IMF working paper content (annual data 1959–2003) provided in the supplied PDF text.*

### References..............................................................................................................

### _wp07113 - References..............................................................................................................

### Introduction and key hypotheses
- The study examines how exchange rate fluctuations affect real activity, recognizing demand- and supply-side channels.
- Demand-side channels: devaluation/depreciation could boost domestic production by stimulating net exports; devaluation could lower consumption via income redistribution from workers to producers (Alexander (1952)).
- Supply-side channels: depreciation raises costs of imported inputs, increasing production costs and potentially curtailing aggregate supply; if supply reduction outweighs demand stimulus, depreciation can be contractionary.
- The paper contrasts contractionary versus expansionary effects of depreciation, noting that choice of exchange rate regime matters when demand and supply shocks impinge on the economy (see Beidas and Kandil (2005)).

### Empirical approaches in the literature
- Four broad empirical approaches summarized:
  - Before-after approach (e.g., Cooper (1971), Krueger (1978), Edwards (1989a)).
  - Group approach comparing devaluing countries to non-devaluing groups (e.g., Donovan (1982), Gylfason (1987), Kamin (1988), Edwards (1989b)).
  - Macro-simulation approach that assumes a shock to the exchange rate and simulates model responses (e.g., Agenor (1991), Krugman and Taylor (1978), Gylfason and Shmid (1983), Gylfason and Risager (1984), Solimano (1986), Barbone and Rivera-Batiz (1987), Taye (1999)).
  - Econometric estimation using cross-sectional, panel, or time-series data (examples: Connolly 1983; Edwards 1989a; Nunnenkamp and Schweickert 1990; Agenor 1991; Rogers and Wang 1995; Hoffmaister and Vegh 1996; Santaella and Vela 1996; Kamin and Rogers 1997; Bahmani-Oskooee and Mirzaie 2000; Bahmani-Oskooee and Anker 2001; Kandil 2000; Bahmani-Oskooee, Chomsisengphet, and Kandil 2002; Kandil and Mirzaie 2002; Kandil 2004; Kandil and Mirzaie 2003, 2005).
- For a comprehensive review of these studies see Bahmani-Oskooee and Miteza (2003).

### Considerations specific to oil-producing countries (and Iran)
- Prior literature often excludes oil-producing countries (especially OPEC members) on the presumption that oil dominates output supply, oil decisions are capacity- or coordination-constrained, oil is priced in foreign currency, and many oil producers peg exchange rates to stabilize oil export proceeds.
- Despite the dominance of oil, depreciation can still be contractionary in oil producers due to higher costs of imported inputs; empirical evidence for Iran (1959–1990) shows depreciation could be contractionary (Bahmani-Oskooee (1996)).
- Iran has undertaken diversification and promotion of non-oil exports, changing the potential responsiveness of non-oil output to exchange rate movements.

### Trends in Iran’s non-oil exports and implications
- Historical ratios and specific values reported:
  - Nonoil exports as a percent of total exports was little over 3% in 1979 (the year of the Iranian revolution).
  - In 2000, non-oil exports stood at almost 27% of total exports.
  - The authors suspect the ratio has increased to, perhaps, 40% in more recent years.
- Empirical observation:
  - The ratio of non-oil exports to total exports increased rapidly in the mid-1980s (during the Iran–Iraq war), attributed to government investment in strategic sectors including petrochemical industry.
  - Petrochemical exports from state-owned enterprises account for a large share of non-oil exports.
  - The surge in the non-oil exports/total exports ratio does not appear to be dependent on the oil price; the correlation coefficient between the ratio of nonoil exports to total exports and the oil price is negative, -0.09, although statistically insignificant.
- Figure 1 (described in the text) plots:
  - The ratio of non-oil exports to total exports (RATIO).
  - Price per barrel of crude oil (OILPN).
  - An index of the oil price (OILPI), scaled from zero to one.
  - The figure shows a clear increase in the relative importance of non-oil exports, with momentum mostly during the 1990s.

### Data notes and composition of non-oil exports
- The list of non-oil exports (as noted) includes: carpets, fresh and dried fruits, pistachio, raisins, all kinds of skin and leather, caviar, casings, gum tragacanth, cumin, cotton, metallic mineral ores, detergents and soaps, chemical products, footwear, ready-made clothes, fabric, cement, stones and construction materials, transportation vehicles and their spare parts, aluminum and articles thereof, copper and copper bar, cast iron, iron and steel, and others.
- The data to generate Figure 1 comes from source c cited in the appendix.

### Study objective and empirical strategy
- The aim is to contrast the effects of exchange rate fluctuations on real output growth in Iran over two sample periods:
  - A period that excludes the recent surge in non-oil exports.
  - A longer sample period including the 1990s surge in non-oil exports.
- The objective is to contrast contractionary and expansionary effects of exchange rate fluctuations across these two sample periods and to test empirically whether increased non-oil export share altered the impact of depreciation.

*Source: _wp07113 - References..............................................................................................................*

### Section II describes the estimation method. Section III presents the empirical results and section

### _wp07113 - Section II describes the estimation method. Section III presents the empirical results and section

### II. The model and the method
- The empirical model replicates the reduced-form solution of Kandil and Mirzaie (2002) and links real output (Ln GDP) to:
  - monetary policy: Ln M (log of money supply, M2),
  - fiscal policy: Ln G (real government spending),
  - the real exchange rate: Ln RE (various measures).
- Long-run specification (equation (1)):
  - LnGDPt = a + b LnMt + c LnGt + d LnREt + εt
- Short-run dynamics are modeled in an error-correction / distributed-lag format (equations (2) and (3)), including:
  - lagged differences of Ln GDP, Ln M, Ln G, and Ln RE,
  - an error-correction representation that embeds the long-run relation.
- Cointegration testing:
  - Uses the Pesaran et al. (2001) bounds-testing approach (F test for joint significance of lagged level variables).
  - The upper bound critical value of the F-test at the 5% level is 4.01 (10% level is 3.52).
  - A calculated F-statistic greater than the upper bound signals cointegration.
- Exchange rate measures used:
  - Bilateral rial-dollar real parallel rate (RE) — an increase indicates depreciation (more rials per US dollar).
  - Bilateral rial-dollar nominal parallel rate (NE).
  - Real effective exchange rate (REFEC) and nominal effective exchange rate (NEFEC) constructed as weighted averages across 21 trading partners (weights λj, ∑λj = 1). An increase in REFEC reflects a real appreciation of the rial.
- Expectations decomposition:
  - Anticipated exchange rate component: fitted values from a 4-lag regression (adaptive expectations).
  - Unanticipated component: residuals from that regression.
- Data and sample:
  - Annual data 1959–2003 (effective rates: 1966–2003; estimation effectively 1970–2003 with maximum lag).
  - Key data sources: International Financial Statistics (IMF), Direction of Trade Statistics (IMF), Central Bank of Iran, Bahmani-Oskooee (2005), World Economic Outlook.
  - Variable definitions: GDP (real, CPI-deflated), M2, G, NE, RE, REFEC, NEFEC (see Appendix I for specifics).

### III. Empirical results — main findings
A. Basic model: bilateral real parallel exchange rate (Table 1)
- Short-run:
  - Monetary growth (∆Ln M) stimulates real output growth in both 1959–90 and 1959–2003 samples (examples of short-run coefficients: ∆Ln Mt = 1.12 (2.53) for 1959–90; 0.98 (4.27) for 1959–2003).
  - Government spending (∆Ln G) is a major short-run determinant in both periods (e.g., ∆Ln Gt = 0.35 (2.17) for 1959–90; 0.37 (3.32) for 1959–2003).
  - Short-run fluctuations in the real parallel dollar price are insignificant in 1959–90 but negative and significant over 1959–2003 (transitory depreciation shrinks output).
- Long-run (Panel B, Table 1):
  - Study Period: 1959–90: Ln RE coefficient = -3.23 (0.29) — statistically insignificant in this shorter sample.
  - Study Period: 1959–2003: Ln RE coefficient = 1.05 (2.51) — positive and highly significant over the extended sample.
  - Interpretation: persistent real depreciation (increase in RE) is expansionary over 1959–2003, consistent with incentives to produce non-oil exports.
- Cointegration and adjustment (Panel C):
  - F-statistics exceed Pesaran et al. upper bound for both 1959–90 and 1959–2003 (upper bound at 5% = 4.01), supporting cointegration.
  - Error-correction term ECMt-1: -0.24 (2.79) significant for 1959–2003 (not significant in 1959–90), indicating convergence toward long-run equilibrium in extended sample.
- Intercept note:
  - Estimated long-run intercept for 1959–2003 is -7.32 (1.95), indicating that absent policy and exchange-rate effects real growth would be negative.

B. Bilateral nominal parallel exchange rate (Table 2)
- Short-run:
  - Procyclical fiscal and monetary policies remain significant determinants.
  - Depreciation of the rial in the parallel market (∆Ln NE) has a positive expansionary short-run effect in both 1959–1990 and 1959–2003 (e.g., ∆Ln NE t coefficient 0.08 (4.21) in 1959–2003).
- Long-run:
  - Study Period: 1959–1990: Ln NE coefficient = 2.50 (0.89) — not significant in the shorter sample.
  - Study Period: 1959–2003: Ln NE coefficient = 0.15 (8.55) — positive and highly significant over the extended sample.
  - Monetary policy long-run effect: Ln M = 0.49 (3.90) in 1959–2003.
- Diagnostics:
  - ECMt-1 = -0.58 (4.69) for 1959–2003 (significant), indicating adjustment to equilibrium.

C. Effective exchange rates (Table 4; sample 1966–2003 / effective estimation 1970–2003)
- Short-run:
  - Both monetary and fiscal policies are important short-run determinants; lagged real output shows persistence.
  - Appreciation of the effective exchange rate (real or nominal) has a positive short-run effect on real output (cheaper intermediate imports): ∆Ln EX t = -0.17 (2.45) for real EX but with positive lagged effects; for nominal EX ∆Ln EX t = -0.09 (2.34) with ∆Ln EX t-1 = 0.06 (1.43).
- Long-run:
  - Real effective exchange rate: Ln EX coefficient = -1.19 (5.69) — negative and significant (appreciation contractionary in the long run).
  - Nominal effective exchange rate: Ln EX coefficient = -0.13 (25.4) — negative and significant.
  - Government spending long-run coefficients: Ln G = 0.57 (4.71) for real EX model; Ln G = 0.47 (16.9) for nominal EX model.
  - Monetary policy long-run: Ln M = -0.11 (0.67) (insignificant) in real EX model; Ln M = 0.35 (10.5) (significant) in nominal EX model.
- Cointegration and adjustment:
  - Adjusted R2: 0.84 (real EX) and 0.90 (nominal EX).
  - F-statistics: 10.33 (real EX) and 19.62 (nominal EX) — both exceed upper bound.
  - ECMt-1: -0.63 (4.45) (real EX) and -1.62 (9.46) (nominal EX) — both significant.

D. Anticipated vs. unanticipated exchange rate components
- Bilateral rial/dollar decomposition (Table 5; sample 1959–2003):
  - Short-run:
    - Procyclical monetary and fiscal short-run effects persist.
    - Significant short-run effects on real growth are attributed to the anticipated component only (∆Ln EX t for anticipated real bilateral = 0.13 (2.22); unanticipated component insignificant).
  - Long-run:
    - Anticipated depreciation (both real and nominal bilateral) has a positive significant long-run effect (e.g., Ln EX for anticipated nominal bilateral = 0.12 (8.25)).
    - Unanticipated bilateral exchange rate shocks are insignificant in the long-run.
  - ECMt-1: negative and significant for anticipated components (e.g., -0.66 (4.57) for anticipated nominal bilateral), not significant for unanticipated components.
- Effective exchange rate decomposition (Table 6; sample 1966–2003):
  - Short-run:
    - Anticipated appreciation of the effective exchange rate stimulates short-run real output growth (via cheaper imported inputs and lagged effects); unanticipated fluctuations are insignificant in the short-run.
  - Long-run:
    - Anticipated persistent appreciation decreases real output growth significantly (Ln EX for anticipated real effective = -1.25 (4.52); for anticipated nominal effective = -0.14 (9.37)).
    - Unanticipated effective exchange rate shocks are insignificant in the long-run.
  - ECMt-1: significant and negative for anticipated effective rate models (e.g., -0.53 (3.63) and -1.02 (5.34)), insignificant for unanticipated models.

### IV. Summary of empirical conclusions
- Exchange rate effects are sample-dependent:
  - Prior to the surge in non-oil exports (1959–1990), there is no evidence of cointegration between output growth and the parallel rial-dollar exchange rate.
  - Over the extended sample (1959–2003), cointegration is strong and persistent depreciation of the rial in the parallel market is expansionary in both the short and long run.
- Effective exchange rate evidence:
  - Currency appreciation is expansionary in the short run (via cheaper imported inputs) but contractionary in the long run (loss of competitiveness). Long-run negative coefficients are observed for REFEC and NEFEC.
- Expectations matter:
  - Anticipated exchange rate movements have significant effects on output (anticipated depreciation of the rial in the parallel market boosts output; anticipated appreciation of the effective rate reduces long-run output).
  - Unanticipated exchange rate shocks are generally insignificant in both short and long run.
- Monetary and fiscal policies:
  - Both policies are procyclical and significant determinants of real output growth in the short run across model specifications.
  - Long-run non-neutrality of monetary policy is evident in some specifications (e.g., nominal effective rate models), indicative of wage/price rigidity and the role of oil-related monetary/fiscal expansions in sustaining growth.

### Policy recommendations (from the analysis)
- Maintain a higher degree of exchange rate flexibility as oil-producing economies diversify exports.
- Exchange rate flexibility need not imply abandoning a peg; gradual and managed flexibility geared toward stabilizing the real effective exchange rate is recommended.
- Manage exchange rate policy mindful of both demand and supply channels and agents’ expectations:
  - Anticipated movements affect supply decisions and competitiveness; managing expectations is important.
  - Rapid policy responses to unanticipated shocks are less critical given their transitory and typically insignificant long-run impact.

### Key numerical highlights (preserving reported values)
- Pesaran et al. (2001) upper bound F-test critical value at 5%: 4.01 (10%: 3.52).
- Table 1 long-run Ln RE coefficients:
  - 1959–90: Ln RE = -3.23 (0.29).
  - 1959–2003: Ln RE = 1.05 (2.51).
- Table 2 long-run Ln NE (1959–2003): Ln NE = 0.15 (8.55); ECMt-1 = -0.58 (4.69).
- Table 4 long-run REFEC / NEFEC coefficients:
  - EX = Real Effective Rate: Ln EX = -1.19 (5.69); ECMt-1 = -0.63 (4.45); F = 10.33; Adjusted R2 = 0.84.
  - EX = Nominal Effective Rate: Ln EX = -0.13 (25.4); ECMt-1 = -1.62 (9.46); F = 19.62; Adjusted R2 = 0.90.
- Table 5 anticipated bilateral nominal long-run: Ln EX = 0.12 (8.25); ECMt-1 = -0.66 (4.57).
- Table 6 anticipated effective long-run:
  - Anticipated real EX: Ln EX = -1.25 (4.52); ECMt-1 = -0.53 (3.63); F = 10.77; Adjusted R2 = 0.84.
  - Anticipated nominal EX: Ln EX = -0.14 (9.37); ECMt-1 = -1.02 (5.34); F = 8.42; Adjusted R2 = 0.85.
- Trade concentration: 21 major trading partners constitute almost 70% of Iranian trade (Table 3 trade figures reported in millions of US dollars for 2003).

*Source: _wp07113 (annual data 1959–2003) — IMF working paper content provided in the supplied PDF text.*

### REFERENCES

### REFERENCES

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*Source: _wp07113 - REFERENCES*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2007/_wp07113.pdf_