Exchange Rate Fluctuations and Output in Oil-Producing Countries: The Case of Iran

IMF Working Papers, May 1, 2007

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Conventional wisdom: currency depreciation in oil-producing countries are contractionary because demand effects, limited by the prevalence of oil exports priced in dollars, are more than offset by adverse supply effects.
Iran-specific result: the emergence of the non-oil export sector has made currency depreciation expansionary.
The expansionary effect is particularly evident with respect to anticipated persistent depreciation in the long-run.
Despite varying effects on demand and supply, managing a flexible exchange rate gradually over time towards achieving stability in the real effective exchange rate may strike the necessary balance.

The paper tests whether the conventional wisdom applies to Iran, given a rapid increase in non-oil exports in the last decade.
Key conceptual contrast: prevalence of oil exports priced in dollars (which limits demand-side stimulus from depreciation) versus growth of non-oil exports (which can amplify demand-side responses to depreciation).
Long-run dynamics: anticipated persistent depreciation has a clearer expansionary association with output.

Consider managing a flexible exchange rate gradually over time.
Aim for stability in the real effective exchange rate to balance demand-side gains from non-oil export responsiveness and supply-side adverse effects.

By Magda E. Kandil, Mohsen Bahmani-Oskooee
May 1, 2007
Series: Working Paper No. 2007/113
Issue: 113
Volume: 2007
Pages: 32
DOI: https://doi.org/10.5089/9781451866773.001
Stock No: WPIEA2007113
ISBN: 9781451866773
ISSN: 1018-5941
Subject: Currencies, Depreciation, Exchange rates, Production growth, Real effective exchange rates
Keywords: critical value, exchange rate, WP

IMF Working Paper — Exchange Rate Fluctuations and Output in Oil-Producing Countries: The Case of Iran (2007/113).