Investigate the Relationship between Exchange Rate Overshooting and Business Cycles in Iran (Using Lucas Experimental Method and Vector Auto-Regressive Model)

Abstract

During 1989-2016, Iran has been repeatedly faced with exchange rate shoke.The main question is Exchange rate overshooting could be considered as a leading variable in business cycles in Iran's economy. Hodrick-Prescott filtering method Exchange rate and gdp shocks in 1989 to 2016 were used.Then; four complete cycles of currency (peak-peak) were identified. Next, applying Lucas experimental method, Cross-correlation between loggdp shock and exchange rate shock was investigated at the time of each four cycles. The resaults showed that exchange rate shocks play a key role as a leading variable in all the periods.Then, Edwards growth model has been specified and used as the impulse response and variance decomposition at VAR technique and the findings show that Exchange rate overshooting is a leading variable in business cycles in Iran's economy.Thus hypothesis cannot be rejected.

Keywords

• exchange rate overshooting
• business cycle
• lucas experienced method
• vector auto-regressive model