Policy Paradox in Foreign Exchange Market Management: Analyzing the Vicious Cycle of Policy Uncertainty and the Exchange Rate Gap in Iran

Taheri Bazkhaneh, Saleh

doi:10.30465/ce.2025.51021.2012

Policy Paradox in Foreign Exchange Market Management: Analyzing the Vicious Cycle of Policy Uncertainty and the Exchange Rate Gap in Iran

Document Type : Scientific-research

Author

Saleh Taheri Bazkhaneh

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

10.30465/ce.2025.51021.2012

Abstract

Given the importance of the exchange rate in macroeconomics and the challenges posed by the gap between the official and free market exchange rates in Iran, this study seeks to provide new insights by examining the reciprocal relationship between economic policy uncertainty and the exchange rate gap in Iran over the period 1981 to 2024. To this end, the continuous wavelet transform and rolling-window Granger causality methods are employed to reveal the dynamic relationships between the variables across time and in the time-frequency domain. The results indicate that economic policy uncertainty, particularly during periods of economic instability, has a positive and significant impact on the exchange rate gap. Additionally, the dynamics of this relationship are reported to vary across different time horizons. In the long run, economic policy uncertainty directly affects the exchange rate gap and is also inversely influenced by it. Based on the analyses presented in the study, the interventionist approach in the foreign exchange market is unable to prevent an increase in economic policy uncertainty and the exchange rate gap. Therefore, this study emphasizes the need to reconsider exchange rate policies and move towards more transparent and market-based policies.

Keywords

Economic Policy Uncertainty

Dual Exchange Rate

Iran's Economy

Time-Frequency Analysis

Time-Varying Parameter Granger Causality

Subjects