Analyzing Exchange Rate Misalignment in Iran Based on Structural VAR Approach

A central problem in empirical macroeconomics is to determine when and how much the exchange rate is misaligned. This paper clarifies and calculates the concept of the equilibrium real exchange rate, using a structural vector auto regression (VAR) model. By imposing long-run restrictions on a VAR model for Iran, four structural shocks are identified: nominal demand, real demand, supply and oil price shocks. The identified shocks and their impulse responses are consistent with an open economy model of economic fluctuations and highlight the role of the exchange rate in transmission mechanism of an oil-exporting country. Nominal and fiscal shocks appear to have important impact on output and the real exchange rate, even in the short run.