THE EFFECTS OF EXCHANGE RATE UNIFICATION POLICY ON BLACK MARKET PREMIUM, INFLATION AND REAL EXCHANGE RATES IN IRAN

Kazem YAVARI (University of Imam Sadiq (a.s))

The purpose of this paper is to analyze the effects of exchange rate unification policy on black market premium, inflation and real exchange rates in Iran. Using monthly data, the paper shows that the 1993 exchange rate unification policy in Iran has definitely reduced the black market premium and increased inflation in a very short run but the medium and the long-run effects of the policy were smaller. The paper indicates that the effects of the exchange rate unification policy on inflation and black market premium depend very much on the accompanying fiscal and monetary policies. The paper also argues that the effect of exchange rate unification policy on the real exchange rate is very short-lived, indicating that the long run movements of the real exchange rate in Iran are determined mainly by movements of fundamentals such as oil exports not by monetary shocks or exchange rate unification policy. The paper also predicts the effects of Iran's 2002 exchange rate unification policy on inflation, black market premium and real exchange rates. The paper concludes that endogenous macroeconomic variables such as inflation, black market premium and real exchange rates cannot be stabilized in long run unless Iranian government maintains discipline in his fiscal policy and smooth the effect of oil shocks on the economy. The Central Back must also follow a well-defined monetary rule with reasonable exchange rate policy, consistent with the fundamentals of the economy.