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An Investigating into the Non-Linear Effect of Trade Openness on Exchange Rate Uncertainty in Iran's Economy

Document Type : Original Article

Authors

1 Assistant Professor, Faculty of Management and Economics, University of Guilan, Rasht, Iran.

2 M.Sc. Student in Economics, Faculty of Management and Economics, University of Guilan, Rasht, Iran.

Abstract

The impact of trade openness on macroeconomic variables holds special importance for developing countries. The ultimate effect of trade openness on exchange rate market volatility as an indicator of macroeconomic stability is a subject of debate. This issue becomes more complex for countries rich in natural resources. Therefore, this study aims to provide a new insight into the non-linear impact of trade openness on exchange rate volatility in the Iranian economy using the Markov switching method. The research findings indicate that during the time period 1974-2022, the effect of trade openness on exchange rate instability is dependent on the volatility in the currency market. Specifically, when currency market instability is low, trade openness has no significant effect on exchange rate instability. However, during periods of high currency market instability, trade openness amplifies the instability in the market. This finding may be attributed to the combination of exports and imports, anchoring exchange rate, and the response of monetary policy to currency market fluctuations and nominal variables.

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References
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Economic Policies and Research
Volume 2, Issue 4 - Serial Number 8
March 2024
Pages 124-149
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