Non-linear relationship between exchange rate and inflation rate in Iran: A nonparametric quantile-on-quantile approach

Document Type : Original Article

Authors

1 Assistant Professor, Department of Economics, Economic Affairs Research Institute

2 PhD student of economic sciences of Tarbiat Modares University and researcher of Economic Affairs Research Institute, Tehran, Iran

3 Assistant Professor, Department of Economics, Payam Noor University, Tehran, Iran

Abstract

The current study aims to test the relationship between inflation rate and exchange rate in Iran as two key indicators of economic performance. For this purpose, the monthly data of the period 1370:1-1402:4 and the quantile-by-quantile regression method have been used. The results show that there is a positive, symmetrical and non-linear relationship between the two variables, and the effect of the increase in the exchange rate on inflation is more severe than the effect of the increase in the inflation rate on the exchange rate. An increase in inflation causes an increase in the exchange rate, but this issue is not the same in different quantiles of the exchange rate. In the low quantiles of the exchange rate (quantile 0 to 4/0), the effect of inflation on the exchange rate is greater than in the median quantile (5/0). In this way, in the low quantiles, its coefficient is around 8/0 and in the middle quantile, it is less than 4/0. Also, in the quantiles above the middle, the effect of inflation on the exchange rate increases again, and its greatest effect is in the high quantiles of the exchange rate, where this coefficient reaches more than 2/1. Also, the effect of increasing the high quantiles of the exchange rate (4/0 to 95/0) on the low quantiles of the inflation rate (0 to 2/0) has been more intense than its effects on the high quantiles of the inflation rate.

Keywords

References

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