مهدی دارابی

This paper investigates the breakdown of a money-demand relationship derived from the Quantity Theory of Money for Iran during episodes of large fluctuations in the real value of oil exports. The joint rise in the inverse velocity of money and the real value of oil exports in the 1970s and 2000s suggests that conventional specifications fail to capture the oil-driven component of money demand. This issue is crucial for monetary policy, because the central bank must distinguish whether increases in desired real money balances stem from supply-side expansions in the transaction base or from shifts in money demand in order to calibrate an appropriate policy response. We hypothesise that real GDP is an inadequate proxy for the supply of goods and services in the Quantity Theory of Money framework, because swings in natural-resource rents from oil are largely excluded from real GDP growth even though, in practice, oil rents finance additional absorption and effective supply. To address this, we examine the impact of both the real price and the volume of oil on the inverse velocity of money using linear ARDL and nonlinear NARDL models. Using these models, we find a long-run level relationship between inverse velocity, the real oil price, and oil production, with positive long-run effects and a significant error-correction term. Asymmetry is concentrated in the short run for oil prices: positive shocks raise inverse velocity more than negative shocks reduce it. For oil production, increases lift inverse velocity while declines are muted, consistent with fiscal smoothing, monetization, and offsetting macroeconomic adjustments under sanctions. Policy should therefore be explicitly oil-contingent, separating oil-driven shifts in money demand from policy-induced balance-sheet expansion, and relying more on quantity instruments combined with fiscal and foreign-exchange sterilization during oil booms.

For decades, debates surrounding the drivers of inflation and exchange rate fluctuations in Iran's economy have persisted. Despite this, a well-established and widely accepted theory among economists exists to explain long-term inflation. This study aims to demonstrate that natural resource rents, particularly oil rents, have partially bridged the aggregate demand-supply gap in the commodity market and the excess money supply gap during periods of increased real oil exports, primarily driven by favorable terms of trade for Iran. Consequently, this leads to two outcomes: first, inflation rates are lower than those implied by monetary theory, and second, exchange rate appreciation is less than what predicted by monetary theory. Preliminary findings suggest that these two claims are plausible. Indeed, the core contribution of this study lies in providing a theoretical explanation and empirical analysis of the impact of oil rents on taming inflation and stabilizing exchange rates in Iran, consistent with established macroeconomic frameworks.

The daily unofficial exchange rate is crucial role in economic agents' decision-making and expectations in Iran. Hence, policymakers have tried to manage the unofficial market by promoting the official exchange rates as a leading price. In this regard, they have established official platforms for foreign exchange transactions. This study investigates the causal relationship between exchange rates discovered on the platforms and unofficial exchange rates by employing the Hong time-varying causality test based on the DCC-MGARCH method. Empirical results show a unilateral causal effect between the unofficial and official exchange rates. The instantaneous causality test results show an instantaneous unilateral causality from unofficial to official exchange rate over the whole period. However, the reverse is only found for some special sub-periods, such as when the extent of sanctions decreases, and the possibility of the Central Bank's intervention increases.

The theory of relative purchasing power parity to determine the long-run trend of the exchange rate in Iran is quite sensitive to the base year selection. So, by changing the base year, trends with a level difference of several hundred percent are obtained. It means that the long-run trend of the real exchange rate is not at a constant level. In other words, contrary to the PPP theory, the real exchange rate trend is not stationary. Empirical studies consider the non-stationary change in terms of trade resulting from the changes in the real oil price as one of the reasons. This study examines the nexus between the real exchange rate and terms of trade in Iran from 1960 to 2020, using the autoregressive distributed lag approach to cointegration as the estimation method. We find that higher terms of trade lead to a decline in the actual exchange rate and vice versa. The results indicate a long-run relationship, which means that the condition needed to estimate the long-term trend of the exchange rate in Iran is to have the same terms of trade in the base year.