Transcript Parallel Market Exchange Rate in Oil Exporting

Parallel Market Exchange Rate
in Oil Exporting Countries:
The Case of Iran
Samila Amanyraoufpoor
Seminar in International Business
Dr. Louise Kelly
Abstract
For almost last three decades Iran has faced
domestic and external shocks;
• Iranian Revolution
• Capital Flight
• Economic Sanctions by the West
• Protracted War with Iraq
• Overall Decline in Oil Exporting Earnings
Introduction
• Severe balance of payment pressure
• Implementing a dual Ex-rate
– Parallel Ex-rate and fixed government
controlled Ex-rate
• The movement in parallel Ex-rate exceeded
2000 percent
Literature Review
• Blejer in 1978 examined the effects of black
market exchange rate expectations on
domestic money demand in three
developing countries (Brazil, Chile and
Columbia) with foreign exchange controls.
He then concluded that a depreciation in the
black market exchange rate lead to a
decrease in domestic money demand and to
an increase in domestic money supply
Literature Review Cont’d
• Hassan in 1992 investigated the role of the credit
constraint, currency depreciation, foreign interest
rates, the domestic rate of inflation and the
domestic income in the demand in Bangladesh and
concluded that, as many other countries, real
income and expected inflation were significant
determinants of the demand for money in
Bangladesh and he also found that foreign interest
rates and currency depreciation do not play any
major role in explaining the demand for money
Purpose of the Research
• To evaluate the role and impact of the black
market exchange rate in the financial or money
market of the Iran’s economy
• To investigate the determinants of demand for
money in Iran
• To observe if my results will support the fact that
the determinants of the money demand appears to
be the real income, expected inflation and
expected depreciation in the black market
exchange rate
Research Questions
•
•
•
Are parallel markets having a significant
impact on money demand in Iran?
Are real income and expected inflation
rates the appropriate scale for the
demand for money function in Iran?
Does depreciation in parallel exchange
rate market exerts a significant negative
impact on the domestic demand for
money?
Government Regulations on
Foreign Ex-Rate in Iran
• Due to ever rising prices and Ex-rate in
Iran, government had to impose a few
policies to regulate foreign Ex-rate;
– Restrictions on exports
– Imposing obligations on certified foreign
exchange deposit for imports
The Macroeconomic Model
• Private Sector
– The private sector producers choose output and input levels for
both the home and exported goods
• Exporting Firms
– The firms set how much of any export revenue to divert to the
foreign exchange market by under-invoicing export sales
• Nationals Working Abroad
– They choose how much of their foreign earnings to channel
through the official foreign exchange market and how much to put
into the parallel markets
• Government
– The government determines the fiscal stance and the rules for
pricing and rationing in the official foreign exchange market
Data Collection
• Data was collected from;
– U.S consumer Price Index at 1995 prices as a
proxy for the world price index because the U.S
market dominates all other national markets
– Quarterly data for the period of 1995 to 2005 to
estimate money demand equations for Iran
– Annual time-series data on real GDP was
collected from the International Monetary Fund
World Economic Outlook data base
Methodology
• Blejer (1978) Methodology;
– The demand for money equation is
estimated by two equations:
• ln (Mi/P)d = a0 + a1lnY + a2Cm
• ln (Mi/P)d = b0 + b1lnY + b2Cm + b3Cf
My Findings
• My finding shows that the inflation rate was
an appropriate opportunity cost of holding
money in a money demand function in Iran
and as domestic currency depreciates
intensively, the demand for domestic money
also declines.
Conclusion
• Depreciation on the expected parallel
market exchange rate will have a significant
effect on the domestic money demand and
hence money supply through individual
portfolio adjustment.