TY - JOUR ID - 5524 TI - The Dynamics of Exchange Market Pressure and Inflation in Iran: Regime Switching Approach JO - Iranian Journal of Economic Studies JA - IJES LA - en SN - 2322-1402 AU - Abtahi, Sayed Yahya AU - Amrollahi Bioki, Elham AD - Accounting and economic dep. islamic azad university, yazd.iran AD - Department of Economic , Science and Research branch, Islamic Azad University, Tehran, Iran Y1 - 2019 PY - 2019 VL - 8 IS - 1 SP - 185 EP - 206 KW - Exchange Market Pressure KW - Inflationary Dynamics KW - Markov Switching Vector Autoregressive Model KW - Monetary Policy KW - Threshold Vector Autoregressive Model KW - Iran DO - 10.22099/ijes.2019.34098.1585 N2 - This study was an attempt to analyze the dynamic reaction of the exchange market pressure (EMP) to different states of the foreign exchange market and inflation in the Iranian economy during 1988:4-2017:4. To this end, the EMP index was calculated using Edwards’s (2002) and Kumah’s (2007) formulae. By considering inflation as the threshold variable and using Threshold Vector Autoregressive (TVAR) model, the results showed that lagged variables had no significant effects on EMP in a low inflation regime,  but inflation had significant effects on EMP in a high inflation regime. The results of using the Markov Switching Vector Autoregressive (MS-VAR) model showed that in EMP and INF equations, the autoregressive coefficients in all lags and in both regimes were significant; this emphasizes the stability of the estimated VAR model. Based on the results of the MS-VAR equations, the results of the Granger Causality Test showed that when the EMP switched to a high regime, the inflation would have a significant impact on the EMP, but in the regimes where the EMP was at a low level, the inflation was not the cause of the EMP. EMP in low inflation regimes could also affect inflation while EMP was not the cause of inflation in high inflation regimes. Therefore, the policymakers should note that increasing EMP, even in low inflation regimes, can lead to pressure on prices. On the other hand, an increase in the foreign reserves causes the EMP to switch to a high regime; then, the inflationary pressures at any level of the inflation rate can exacerbate the exchange market pressure, and policymakers would be unable to control the currency market. Thus, if the EMP is controlled, the effects of inflation on the EMP will be discontinued, and this is a key point for policymakers. UR - https://ijes.shirazu.ac.ir/article_5524.html L1 - https://ijes.shirazu.ac.ir/article_5524_786ddc9d563800608519218967028bdf.pdf ER -