Investigate the Relationship between Exchange Rate Overshooting and Business Cycles in Iran  (Using Lucas Experimental Method and Vector Auto-Regressive Model)

Moayeri, Farzad; Zayandeh Roodi, Mohsen; Jalaei Esfandabadi, Seed Abdolmajid; Mehrabi Basharabadi, Hossien

doi:10.22075/jem.2018.11509.1031

Investigate the Relationship between Exchange Rate Overshooting and Business Cycles in Iran (Using Lucas Experimental Method and Vector Auto-Regressive Model)

Document Type : Original Article

Authors

farzad moayeri ¹

Mohsen Zayandeh Roodi ²

Seed Abdolmajid Jalaei Esfandabadi ³

Hossien Mehrabi Basharabadi ³

¹ PhD student in Economics,Department of economics, Kerman Science and Research Branch, Islamic Azad University, Kerman, Iran

² Assistant Professor in Economics, Department of economics, Kerman Branch, Islamic Azad University, Kerman, Iran

³ Professor of in Economics, Shahid Bahonar University of Kerman, Iran

10.22075/jem.2018.11509.1031

Abstract

During 1989-2016, Iran has been repeatedly faced with exchange rate shoke.The main question is Exchange rate overshooting could be considered as a leading variable in business cycles in Iran's economy. Hodrick-Prescott filtering method Exchange rate and gdp shocks in 1989 to 2016 were used.Then; four complete cycles of currency (peak-peak) were identified. Next, applying Lucas experimental method, Cross-correlation between loggdp shock and exchange rate shock was investigated at the time of each four cycles. The resaults showed that exchange rate shocks play a key role as a leading variable in all the periods.Then, Edwards growth model has been specified and used as the impulse response and variance decomposition at VAR technique and the findings show that Exchange rate overshooting is a leading variable in business cycles in Iran's economy.Thus hypothesis cannot be rejected.

Keywords

Exchange rate overshooting

business cycle

Lucas experienced method

Vector auto-regressive model