The Effect of Exchange Rate Volatility on Imports of Capital Goods in the Industry Sector of Iran During Sanctions

 

Volume 3, Issue 4, Number 4, Pages 54-70, Published Online October 20, 2015

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Author(s):

Dr. Reza Roshan

ABSTRACT:

 This paper investigates the effect of Exchange Rate Volatility (ERV) on Imports of capital goods in Iran’s Industry for the period of 1979-2012 In terms of sanctions. In the first stage, we consider a special case of GARCH family model to measure ERV. In the second stage, we employed the OLS approach for estimating the import demand function for Iran’s industry sector, so that ERV has entered in the model as an explanatory variable. The other explanatory variables considered for multivariate estimation include the value of production of industrial goods and relative prices index of Imports of capital goods. The result of Engle-Granger Co-integration test shows a long term relationship between the imports of Iran’s industrial goods, ERV and other variables. The findings suggest that ERV has negative impact on Imports of capital goods in Iran’s Industry. In addition, the effect of relative prices index is negative, but the effect of production of industrial goods on the Imports of capital goods is positive.

KEYWORDS:

exchange rate volatility, imports of capital goods, GARCH model, Iran’s Industry, Engle-Granger co-integration.

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