Does the official exchange rate in Iran follow the exchange rate of parallel and shadow markets and is affected by them?

Articles in Press

Document Type : Original Article

Authors

1 Ph.D. Student in Economics, Department of Economics, University of Semnan

2 Associate professor in Economics, Department of Economics, Semnan University

3 Professor in Economics, Department of Economics, Semnan University

4 Associate professor in Economics, Economic Research Institute, Tarbiat Modares University

10.22075/jem.2025.35806.1948

Abstract

The parallel market and shadow market (exchange rate calculated in the gold market) exchange rates play a key role in economic decision-making, reflecting the expectations of agents and policy institutions. Central banks intervene in the exchange market for various reasons with various motivations such as controlling fluctuations, reducing the parallel market premium (PMP), or addressing exchange rate misalignments (or a combination of policy goals), So raising the question: Do Iranian policymakers consider these rates when setting the official exchange rate? Do they follow these rates in setting the official rate, or do they base the official rate solely on other policy goals? This study examines the influence of parallel and shadow rates on the official rate using daily data from April 2010 to June 2024. Utilizing the generalized additive model (GAM), it explores the linear and nonlinear effects of these rates on the official exchange rate. The findings suggest that parallel and shadow rates should be included in macroeconomic modeling, as they explain 99.6% of the changes in the official rate. This indicates that the Central Bank considers both current and past parallel and shadow rates to reduce market premiums. The results contribute to the literature on determining the official rate and market intervention policy. According to our findings, it is suggested that the parallel rate and shadow rate variables be included in macroeconomic exchange rate modelling.

Keywords

Journal of Econometric Modelling

Articles in Press, Accepted Manuscript
Available Online from 06 January 2025

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