Document Type : Research Paper
Authors
Shahid Beheshti University
Abstract
Exchange rate fluctuations and high and continuous inflation rates in an economy can be considered two significant factors in creating economic uncertainty, which can cause considerable damage to economic growth, increase the unemployment rate, and spread the unfair distribution of wealth. According to the destructive effects of exchange rate fluctuations and inflationary deviations, two main goals were pursued in this study. The first goal of this study was to investigate the mutual relationship between exchange rate fluctuations and inflationary deviations monthly from May 2004 to February 2023 using Granger causality and Toda and Yamamoto causality. The second goal of this study was to evaluate the effect of exchange rate fluctuations on core inflation based on the Mandel-Fleming stochastic model using the ARDL method during 1974-2022. The results show that the mutual relationship between the variables of exchange rate fluctuations and inflation deviations is confirmed. In addition, the obtained results corroborate the positive effect of exchange rate fluctuations, liquidity, and exchange rate on core inflation. Nevertheless, GDP adversely affects core inflation. According to the obtained results, it is recommended that to reduce exchange rate fluctuations and control inflation, a suitable and efficient currency system should be created and followed by the government, so that through it, economic security and directing liquidity toward productive activities will increase. Also, it is necessary to apply coordinated and optimal financial and monetary policies to control inflation and reduce exchange rate fluctuations.
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