The Impact of Exchange Rate Policies and Liquidity Creation on Selected Macroeconomic Variables of Iran: A Dynamic Stochastic General Equilibrium Approach

Articles in Press

Document Type : Original Article

Authors

• Seyed Afshin Mosavi ¹
• Sara Ghobadi ¹
• Bahar Hafezi ²
• Yazdan Gudarzi Farahani ³

¹ PhD Student in Economics, Department of Economics, Isfahan (Khorasgan) Branch, Islamic Azad University, Isfahan, Iran

² Assistant Professor, Department of Economics, Isfahan (Khorasgan) Branch, Islamic Azad University, Isfahan, Iran

³ Assistant Professor, Department of Islamic Economics, Faculty of Economic and Administrative Sciences, University of Qom, Qom, Iran.

https://doi.org/10.22067/mfe.2025.92415.1521

Abstract

This paper examines the effects of exchange rate policies and liquidity creation on key macroeconomic variables in Iran. Using quarterly data from 1991 to 2023, we employ a Dynamic Stochastic General Equilibrium (DSGE) model to analyze the transmission mechanisms of these shocks. The Iranian economy has long grappled with the interdependence of exchange rate and monetary policies, presenting significant challenges for policymakers. A substantial portion of government budget expenditures is financed through oil export revenues and withdrawals from the Foreign Exchange Reserve Account. This dynamic compels the Central Bank to purchase foreign currency, consequently expanding the monetary base. Given this linkage, monetary authorities must carefully assess the impact of oil revenue fluctuations when formulating policies to ensure economic stability. Our study specifically investigates: The exchange rate policy channel (transmitted through exchange rate adjustments). The monetary policy channel (transmitted through liquidity creation). Key findings reveal that: Exchange rate shocks have a more pronounced inflationary effect compared to liquidity creation shocks. These shocks also lead to reductions in both consumption and income, underscoring their contractionary impact on the economy. These results highlight the critical role of exchange rate management in Iran’s macroeconomic stability and suggest that policymakers should prioritize mitigating exchange rate volatility to curb inflation and support economic growth.

Keywords

• Exchange rate
• liquidity creation
• monetary policy
• inflation rate
• dynamic stochastic general equilibrium model

Main Subjects

• Financial monetary economy