saqartvelos mecnierebata erovnuli akademiis moambe,. 9, #2, 2015 BULLETIN OF THE GEORGIAN NATIONAL ACADEMY OF SCIENCES, vols. 9, no. 2, 2015 Economy Invesigaion of he effec of he degree of openness of he economy on real effecive exchange rae Volailiy: case sudy (he Iran economy) Bayram Pakravan *, Asadollah Farzin Vash **, Farhad Ghaffari *** * Deparmen of Economics, Science and Research Branch, Islamic Azad Universiy, Tehran, Iran ** Deparmen of Economics, Tehran Universiy, Tehran, Iran (Corresponding Auhor)E-mail: farzinv@u.ac.ir *** Deparmen of Economics, Science and Research Branch, Islamic Azad Universiy, Tehran, Iran ABSTRACT. This paper reviews and deecs he imporan facors affecing he real effecive exchange rae volailiy in he economy of Iran during he period 1980-2012. The resuls of esimaing he model by he mehod of Auo Regressive disribued lag suggess ha he variables including degree of openness and raio of governmen expendiure o gross domesic producion have a significan and negaive impac and in conras variable of nominal growh of labor produciviy have a posiive and significan impac on he real effecive exchange rae volailiy in he Iran economy. While he impac of he variables, he liquidiy growh and financial developmen index on he real effecive exchange rae volailiy is insignifican in Iran economy. Also in his aricle wih emphasis on Obsfeld - Rogoff model, he effecs of he ineracions beween he degree of openness of he economy and he variables including nominal growh of labor produciviy, liquidiy growh and raio of governmen expendiure o gross domesic producion has been esed on real effecive exchange rae volailiy, and increasing he degree of openness of he economy leads o reducing he influence of nominal growh of labor produciviy shocks on real effecive exchange rae volailiy bu is ineracion wih raio of governmen expendiure o gross domesic producion shocks has a posiive and significan effec on real effecive exchange rae volailiy. While he ineracion beween he degree of openness of he economy and he nominal money supply shock on real effecive exchange rae volailiy is insignifican in Iran economy. 2015 Bull. Georg. Nal.Acad. Sci. Key words: real exchange rae volailiy, degree of openness, Auo Regressive disribued lag model, Iran economy INTRODUCTION The real effecive exchange rae is one of he main indexes in deerminaion of he degree of compeiiveness of economies and explanaion of domesic and foreign siuaion of he economy. The consan volailiy in he real effecive exchange rae and is impac on domesic and foreign prices leads o increasing uncerainy and insabiliy of macroeconomic and reducing he invesmens in he real economy and increasing endency o speculaive and brokerage aciviies. Research resuls show ha he value added of he economy has a negaive relaionship wih exchange rae volailiy and is deviaion from he equilibrium pah. In he oher words, deviaion of he real exchange rae from is equilibrium pah and overvaluaion of he domesic currency reduce he compeiiveness power of domesically manufacured goods in inernaional markes and, herefore, reduce he profiabiliy of producion. Also deviaion of he real exchange rae as a disurbance in he relaive prices of sociey leads o capial fligh from he counry as well as divering he resources and capial from heir opimal allocaion. In fac, real exchange rae volailiy reflec he insabiliy and uncerainy in he rend of relaive prices ha increases he risk and uncerainy in invesmen reurns and hus, he economic agens are no able o predic economic policies and heir 2015 Bull. Georg. Nal. Acad. Sci.
Invesigaion of he effec of he degree of openness of 131 incomes, so increasing real exchange rae volailiy will reduce he producion in he economy.wih he collapse of he Breon Woods sysem in 1971 and he adven of floaing exchange rae regime in he mos economies in he world, he nominal and real exchange rae faced severe volailiy (Sockman, 1983; Mussa, 1986). Many economiss condemned and blamed moneary auhoriies for he formaion of such volailiy, according o Flemeing - Mundell (1962) and Dornbusch (1976), implemenaion of unpredicable moneary policy shocks by he cenral bank leads o he formaion of he nominal exchange rae volailiy and ulimaely volailiy in he real exchange rae. In fac, in heir opinion, he nominal exchange rae volailiy, as a nominal price was he main reason of real exchange rae volailiy, which is mainly due o arisen disrupions in financial and moneary markes (nominal shocks), and i s because of he slow adjusmen of goods and services marke agains financial markes in case of such shocks in he economy. However and despie he effors of many economies o sabilize he moneary policy, and reduce moneary and fiscal disurbances, he amoun of volailiy in he real exchange rae has no been reduced (Rogoff, 1999), which is why many economiss quesioned he heory of Dornbusch (1976), rejeced he hypohesis of insabiliy in moneary policy, as he only facor of real exchange rae volailiy, and considered he moneary models incapable o predic he real exchange rae volailiy (Meese & Rogoff, 1983).Calderon (2004) has examined real exchange rae volailiy in he framework of he "New Open Economy Macroeconomics" and considered non-moneary facors such as produciviy shocks, governmen expendiure, erms of rade, he degree of openness of he economy and he kind of he sysem of exchange rae as effecive facors separaed from moneary facors in he creaion of he real exchange rae flucuaions, and in he meanime, Sancik (2006) considered he degree of openness of he economy more effecive compared o oher facors.some sudies by he oher economiss suggess ha under a floaing exchange rae sysem in many developed counries, real exchange rae movemens have random walk, largely due o he sickiness of prices in he shor erm 1. Therefore real exchange rae convergence owards purchasing power pariy is very difficul. Mos economiss failed in rejecing he hypohesis of random walk behavior of real exchange rae even in he long erm (Rogoff, 1996) and he reason of real exchange rae random walk moion was of special ineres of economiss, as he sudy of Bleaney (2006) suggess he openness of economies reduces he real exchange rae volailiy and he loss of is random walk moion, and economies wih similar volailiy in he nominal exchange rae, in case of furher ineracion wih he foreign economies, have less volailiy in real exchange rae, and i s also because of he adjusmen of price level associaed wih he nominal exchange rae volailiy. In his paper, by using Auo Regressive disribued lag economeric echniques and based on he model of Obsfeld - Rogoff (1995 and 1996), we invesigae he effec of he degree of openness of he economy on he real effecive exchange rae volailiy in he economy of Iran by considering he oher independen variables such as raio of governmen expendiure o gross domesic producion, he nominal growh of labor produciviy, liquidiy growh, and financial developmen index. The ineracion effecs of produciviy and moneary shocks and governmen expendiure wih he degree of openness of he economy on he real effecive exchange rae volailiy have also been examined. The second and he hird par of he paper are devoed o he lieraure and he conduced sudies in his field. In he fourh par, he model, es mehods, model esimaion and inerpreaion of he resuls will be presened. The final par of he paper is devoed o he conclusions of he discussions and he final consideraions. 2- Theoreical and empirical foundaions The differen definiions of he real exchange rae will be presened. Real exchange rae is generally he raio of he index of commodiy prices in he commercial side counry o he index of commodiy prices inside he counry, which can be expressed on he basis of a common currency, and changes in his index represens changes in he compeiiveness power of domesic goods. In above equaion, REER is real exchange rae, NER is nominal exchange rae, and P and P * are domesic and foreign consumer price index respecively. In anoher definiion, he real exchange rae is called o he raio of he price of radable o nonradable goods prices. is radable goods prices and is non-radable goods prices in he domesic economy. The main disadvanage of his mehod is ha in pracice here is no fixed border for radable and nonradable goods o be able o calculae he price index.given ha he real effecive exchange rae has been used in his aricle, he real effecive exchange rae refers o he weighed average of he value of he naional currency of a counry relaed o he value of he naional currency of oher counries and in fac i is he weighed average of he real exchange rae and he weighs are deermined based on he relaive imporance of he rade of he counry wih each of he rading parners. 1. In fac, moneary and financial shocks influence he nominal exchange rae in he shor-erm and lead o real exchange rae flucuaions.
132 A.F.Vash [ ] In he above equaion, is he goods price index of he counry, is he goods price index of he ih foreign counry, is nominal exchange rae, BRER is real exchange rae and m is he number of rading parners. In he above equaion, he geomeric mean has been used and w i is he proper weigh for he counry i (Hinkle & sangiyumva; 1999).According o "New Open Economy Macroeconomics" facors affecing he real exchange rae volailiy divides ino wo caegories of moneary and non-moneary facors. The firs viewpoin which has been inroduced by Dornbusch (1976) indicaes ha unprediced moneary shocks hrough he exchange rae overshooing can lead o he creaion of volailiy in he exchange rae. In he oher words, low speed of adjusmen of goods and services marke compared o he financial markes will cause a very severe effecs of moneary shocks on he exchange rae in shor erm. According o he second viewpoin, which have been proposed by economiss such as Sockman (1988), Macdonald (1998) and Obsfeld - Rogoff (1995 and 1996), in addiion o he influence of moneary shocks on exchange rae volailiy, non-moneary facors such as produciviy shocks, he degree of openness of he economy and governmen expendiure shocks can be effecive on real exchange rae volailiy. Each of hese viewpoins will be discussed in he following. 2-1- Dornbusch heory (moneary heory of exchange rae volailiy) This model suggess ha he exchange rae volailiy have a moneary roo. The model has been proposed by Dornbusch in 1976 in a moneary model for he firs ime. He has presened his discussion in he form of a sandard Flemeing - Mundell model in a small counry, wih he assumpion of floaing exchange rae and full capial mobiliy, and by assuming he esablishmen of purchasing power pariy (a leas in long erm), based on hree commodiy marke, money and financial asses. In he sense ha if he economy is exposed o permanen unexpeced moneary expansion policies, exchange rae in he shor erm exceeds is equilibrium value in he long erm and again, he new equilibrium level will be obained in he long erm, in which he condiion of purchasing power pariy will be esablished again.in his view, he exchange rae overshooing is basically a shor-erm phenomenon which comes from he non-uniform speed of adjusmen in commodiy markes and financial markes. In he oher words, since prices are no adjused immediaely due o he exisence of sickiness in he commodiies marke, shock from increased nominal volume of money appears in he form of he exchange rae overshooing due o flexible financial asses marke, and over ime, he immediae effecs of he shock are resolved gradually, and goods markes and money and asse markes are reached o an equilibrium. Overshooing of he exchange rae is cleared hrough money demand relaionship. M = P. L (r+ П*, Y) (1) In which, r is he real ineres rae, L is money demand funcion, P is he general price level, M is nominal volume of money, Y is naional income and П* is he expeced inflaion. General Price level is a balanced combinaion of radable (p) and non- radable (Ep*) goods prices. General Price level will be as follows if we show he conribuion of hese wo by he value of α and α-1 (1> α> 0) in general price index: (2) In which, E is nominal exchange rae, p* is foreign price level. Wih replacemen of equaion (2) in equaion (1), we ll have: M. L (r+ П*, Y) (3) According o he above equaion and assuming a consan demand for money and he consan general price level in wo counries in he shor erm, i can be seen ha any increasing in he volume of money affec he exchange raes direcly, as he mos sensiive variable. Due o he conribuion of radable goods prices (which is smaller han one) in he general price level, he exchange rae increasing will be much higher han increasing in he volume of money. By differeniaing of equaions (1) and (2) and heir replacemen in each oher, we ll have: (4) Since 1 / (1-α) is larger han one, so E / E will be larger han M / M. Since here is a greaer change in he exchange rae compared o he volume of money, equaion (4) refers o he exchange rae overshooing.the adjusmen process of he exchange rae overshooing is ha afer he unexpeced increase in he volume of money,
Invesigaion of he effec of he degree of openness of 133 he exchange rae will be increased immediaely. This means ha increasing in he volume of money will be followed immediaely by reducing he ineres rae, which is a conradicion regarding he ineres rae pariy relaionship. Therefore, in order o neuralize he effec of ineres rae cus, he exchange rae should be overshooing sufficienly in order o devaluaion of he naional currency, so is reurn o long-erm equilibrium rae in line wih increasing he value of he naional currency, compensae he ineres rae cus. In he process of adjusmen, i is necessary ha price level, ineres rae and exchange rae end o heir long erm equilibrium value. So ha he changes in he general price level, he volume of money and exchange rae would be idenical. In Dornbusch heory, i is assumed ha foreign and domesic financial asses are perfec subsiues for each oher, and also adjusmen in he general price level is done slowly. 2-2- he source of non-moneary exchange rae volailiy Produciviy shocks According o Balassa-Samuelson effec, if he produciviy of radable secor is higher han he non-radable secor, in his case, wage increase in radable secor lead o pressure for wage increase in non-radable secor, wihou changing he produciviy. Therefore, his leads o an increase in prices of non-radable goods and by assuming a consan price for radable goods in wo counries, consequenly, in a counry wih high produciviy of radable secor, general price level and real exchange rae will decrease. Based on he menioned heory, he Economy are divided ino radable and non-radable secors and he price of non-radable secor is a funcion of he produciviy difference beween radable and non-radable secors of he economy. In oher words, produciviy growh in he radable secor will lead o he price growh of non-radable secor. In fac, he inernal ransmission mechanism of Balassa-Samuelsson effec is as follows: is he price growh of non-radable secor, is he produciviy growh of radable secor, is he produciviy growh of non-radable secor, and are producion elasiciy in non-radable and radable secors respecively relaive o he labor force. Therefore any increase in produciviy of radable secor leads o an increase in prices of non-radable goods, and according o equaion he real exchange rae decreases. Governmen expendiure shock Governmen consumpion expendiure also Influence he real exchange rae. This effec depends on wheher he menioned expendiure, affecs consumpion of radable goods or non-radable goods.edwardes (1989) suggess ha an increase in governmen expendiure will increase he demand for non-radable goods and services a firs, which leads o increase in he prices of non-radable goods. As a resul, he real exchange rae will decrease and ges away from is long-erm and he domesic currency will be srenghened. In he nex sep if he increase in governmen expendiure comes from ax increases, his reduces he disposable income of households and leads o decrease in consumpion and prices of non-radable goods. Thus, he impac of increased governmen expendiure on he real exchange rae is ambiguous. On he oher hand, if he increase in governmen expendiure is owards producion and leads o increased invesmen and producion of goods and services wihin he counry, in his case, non-radable goods price will decline and real exchange rae will increase. Financial Developmen Financial developmen can reduce he exchange rae volailiy, in he oher words, financial developmen can faciliae agencies accessibiliy o finance especial resources of needed exchange and make hem proeced agains he effecs of exchange rae volailiy. The role of developed financial markes, as a currency broker in exchange ransfer from he secors wih excess exchange o he secors wih deficien, is imporan and financial developmen can increase he produciviy growh of firms by reducing he exchange rae volailiy. In fac, he firms ha are exposed o liquidiy shocks and forced o borrow in he marke. For hese firms, heir borrowing capaciy is a coefficien of heir curren income and his coefficien is deermined by financial developmen. The more he financial developmen, The higher he menioned coefficien. Given ha he firms engaged a he inernaional level and domesic prices, and consequenly he firms income would be affeced by he exchange rae, so he curren income of firms will be decreased by he exchange rae appreciaion and heir abiliy o borrow will be reduced agains liquidiy shocks. As a resul, exisence of he financial difficulies will reduce he innovaion in he firms, in which heir innovaion and liquidiy is a funcion of liquidiy flow. Therefore, he lower he financial developmen index (he raio of deb capaciy o earnings), he more being suscepible o volailiy in innovaion and consequenly
134 A.F.Vash he produciviy growh for he firms. Bu financial Developmen, by providing he necessary foreign exchange firms, Reduce exchange rae volailiy and liquidiy shocks on firms and leads o a posiive effec on he economic efficiency of firms. The degree of openness of he economy Jorge and Romain (2008) have invesigaed he effec of degree of openness of he economy on he real exchange rae hrough he wo channels. Firs hrough he liberalizaion and reforming he rade policies, for example, decreasing impor ariffs may increase he demand for he impor, which is par of radable goods, and leads o a decrease in demand and prices of non-radable goods and consequenly increase in real exchange rae. Also, an increase in impor ariffs can have an opposie effec. The degree of openness of he economy, in is direc impac on real exchange rae, can cause deviaion and volailiy from is equilibrium value in he long erm.second, he degree of openness of he economy can reduce volailiy of real exchange rae indirecly, his means ha he greaer he degree of openness of he economy, he impac of moneary and non-moneary shocks on he real exchange rae volailiy is reduced and he relaionship beween hese wo has been proved by Obsfeld - Rogoff (1995 and 1996). In heir model, any real shocks infliced on he economy hrough creaing shock in radable goods price ( ) can affec he real exchange rae volailiy, Bu wih he increasing degree of openness of he economy, he effeciveness of he shocks on he real exchange rae volailiy are reduced. This means ha, we have: ( ) In above equaion, ( ) is he variance of radable goods price, which is affeced by nominal money supply shocks and real shocks of he economy such as he produciviy changes of labor, governmen expendiures and oher variables. Also is he variance of he real exchange rae and indicaes he degree of openness of he economy. 3- Empirical sudies Hau (2000) has invesigaed he relaionship beween he real exchange rae volailiy and he degree of openness of he economy for 54 indusrialized counries by using cross-secional daa from he year 1980 and he resuls has indicaed ha here is a negaive relaionship beween he real exchange rae volailiy and he degree of openness of he economy and in his sudy, one percen change in he degree of openness of he economy led o 52 percen decreasing in he real exchange rae volailiy. Caporale e al (2009) have invesigaed he facors affecing he real exchange rae volailiy in 39 developing counries, by using dynamic panel daa approach, wih emphasis on moneary facors, exernal facors and real shocks, and heir findings indicae ha among he variables affecing he real exchange rae volailiy, he degree of openness and volailiy he volume of liquidiy are considered as he imporan effecive variables, and he real exchange rae volailiy are reduced by increasing degree of openness. Hausman e al (2006) have sudied he difference beween real exchange rae volailiy among he counries, by using daa from 74 indusrial and developing counries over he period 1980-2009. They ve suggesed ha he exchange rae volailiy in developing counries is almos 3 imes higher han in indusrialized counries. Their resuls indicae ha he difference in exchange rae volailiy beween hese wo groups highly depends on he levels of financial developmen and he degree of openness of heir economies. Agarwal (1998) has sudied he effec of he liquidiy volume variable, ineres rae and foreign and domesic price index on he behavior of he real exchange rae and his resuls sugges a posiive effec of domesic price index and money demand on exchange rae and a negaive relaionship beween foreign price index and ineres rae wih he exchange rae. Cerda (2002) has sudied he impac he degree of openness of he economy on he real exchange rae volailiy in America and his resuls sugges a lower real exchange rae volailiy in his counry due o he high volume of rade wih oher counries. Magoy and Agarwal (2011) have sudied he relaionship beween he rade volume and exchange rae volailiy by using he daa of he imporan exchanges such as US dollar, Briish pound, Canadian dollar and Japanese yen and heir findings show ha here is a negaive relaionship beween he rade volume and he exchange rae volailiy. Calderon & Kuboa (2009) have invesigaed he impac of he degree of rade openness on he real effecive exchange rae volailiy in 82 developed and developing counries over he years beween 1975-2005 and heir resuls indicae ha by increasing he degree of rade openness in hese counries, he real exchange rae volailiy decreases. Cociu (2007) has examined he impac of rade openness on real effecive exchange rae volailiy in eleven membercounries of Cenral and Easern Europe during he period 1995-2006, and his resuls sugges ha by increasing he degree of rade openness in hese counries, he real exchange rae insabiliy decreases. Hamori and Tanizaki (2004) have sudied he sources of real exchange rae volailiy in six African counries. The monhly daa has been used in his sudy for he period 1990-2003. Resuls of his sudy indicae ha real facors play a prominen role
Invesigaion of he effec of he degree of openness of 135 in he real exchange rae volailiy, and he resuls also show ha he floaing exchange rae regime is as appropriae exchange regime in hese counries. Juvenal (2009) has examined he role of moneary and non-moneary facors in explaining he behavior of he real exchange rae in America's economy by using a srucural VAR model. In his research quarerly daa over he period 2007-1976 has been used. His findings sugges ha moneary facors are insignifican in explaining real exchange rae volailiy. The resuls indicae also he real facors play an imporan role in explaining he behavior of he real exchange rae. Tayyebi and Zamani ((2012) have examined he relaionship beween he real exchange rae volailiy and he degree of openness of he economy for 24 OECD counries and Iran during he period 1975-2009. The resuls sugges ha openness of he economy adjus he exchange rae volailiy in OECD counries, which ofen have floaing exchange rae regime and he same resuls are also confirmed for Iran's economy, which has managed floaing exchange rae regime. Abdolnaser Hemmai and Alireza Mobasherpour (2010) have invesigaed he impac of real and unreal shocks on real exchange rae flucuaions by using he srucural VAR model and quarerly daa during he period 1990-2008, and wih assuming he consan nominal shocks in long erm. The resuls show ha real shocks play an imporan role in explaining he real exchange rae flucuaions. I also indicaes ha nominal shocks in he shor erm and long erm can explain 53 and 39 percen of he nominal exchange rae flucuaions respecively, so using a sable moneary policy can reduce he real exchange rae flucuaions in he economy. Considering he imporance of real shocks on he real exchange rae flucuaions, hey also express he governmen can improve he compeiiveness environmen of he economy hrough increased produciviy and efficiency by reducing he real exchange rae flucuaions. 4- Economeric auoregressive disribued lag model In general, dynamic model is a Model in which variables lag Appear in he regression model as follows. Y (1) In small samples, i is beer o use a model ha considers a large number of lags for he variables included in he model o reduce he bias of he esimaed coefficiens of he model. ( ax L, P ) Y bx cy 1 1 k u (2) In he above equaion, Y is he dependen variable and Xi are he independen variables. The erm L is he lag operaor and W is an S 1 vecor ha represens he predeermined variables in he model Include he inercep, virual variables, ime series and oher exogenous variables. P is he number of lags used for he dependen variable and q is he number of lags used for he independen variables (Xi). The above model is called an auoregressive disribued lag model, where we have: L, P ) b i 1 b i ( L, q i ) X ( 2 1 2 i c w 1 L L... ( L, q ) b b i i i 0 i1 L... b i=1,2,,k (4) The number of opimized lags for each of he explanaory variables can be deermined by Akaike Crierion (AIC), Schwarz-Bayesian Crierion (SBC), Hannan-Quinn Crierion (HQC). The Schwarz-Bayesian crierion is usually used for small samples, o avoid losing he large number of degree of freedom. This crierion is hrify in deermining he lags and, herefore, he esimaion will have more degrees of freedom (Pesaran and Shin, 1996). The dynamic model is used o calculae he long-erm coefficien of he model. The long-erm coefficiens of he variables X is obained from he following equaion: (5) In auoregressive disribued lag model, afer esimaing he dynamic ARDL model, he following hypohesis is esed for examinaion of he long-erm relaionship beween model s variables: iq L q u L p p bˆ bˆ bˆ L q bˆ (, )... i i i 0 i1 iq, i 1,2,..., k i 1 ˆ( L, p ) 1 ˆ ˆ... ˆ 1 2 p (3) (6) The null hypohesis indicaes ha here is no coinegraion or long erm relaionship beween he variables in he model. To perform he es presened by Banerjee e al (Banerjee, e al, 1992), a number should be deduced from he sum of coefficiens of he esimaed dependen variable and divided by he sum of he sandard deviaion of he menioned coefficiens. So ha The saisic es is -saisic.
136 A.F.Vash p ˆ i 1 i 1 p S ˆ i i 1 (7) If he absolue value of he obained -saisics is larger han he absolue criical values presened by Banerjee, Dolado and Maser a he confidence level of 95%, he null hypohesis, based on he lack of he exisence of coinegraion and long-erm relaionship beween he variables of he model, will be acceped. Ulimaely we esimae he error correcion model (ECM) for he long-erm relaionship. This model relaes he shor-erm flucuaions of he variables o he long-erm equilibrium values. The coefficien of he erm of long-erm error model wih a ime lag is he adjusmen coefficien and shows he speed of adjusmen o he long-erm equilibrium.the main objecive of his paper is o sudy he direc and indirec effecs of he degree of openness of he economy on he real exchange rae volailiy by adoping he model Obsfeld Rogoff. Therefore, real effecive exchange rae volailiy is considered as he dependen variable in he model. The variables of he model are as follows: is logarihm of he real effecive exchange rae condiional variance, is he degree of openness of he economy, m2g is he liquidiy growh, is he nominal growh of labor produciviy, is he raio of governmen expendiure o Gross Domesic Producion, is he logarihm of financial developmen index. The model proposed by Engel ARCH (q) is he simples model for he condiional variance of he effecive real rae, in which he condiional variance is weighed mean of he square of forecas errors of he pas, which means we have: In which, v is whie noise process. Engel equaion can be expanded as follows: In which, h is he condiional variance of e. Convenional condiional volailiy form is GARCH (1,1) ha is as follows: The crieria of Akaike (AIC) and Schwarz - Bayesian (SBC) have been used o obain he mos appropriae ARCH and GARCH model. To esimae he real effecive exchange rae volailiy, firs he reliabiliy of he variable has been examined, hen an adequae model for he real effecive exchange rae behavior has been provided, and in nex sep, real effecive exchange rae volailiy has been obained. - Degree of openness will be achieved from he raio of he sum of expors and impors (rade volume) o gross domesic produc. -Nominal growh of labor Produciviy is obained from changes in per capia producion of he employed labor, as follows: - In his paper m2g changes, which includes currency and checking, demand deposis and ime savings deposis, is used as growing liquidiy. - Financial developmen index (FD), acually indicaes he financial resources in he form of loans and financing hrough moneary and banking secor, which are available for privae secor, and i s also calculaed hrough he raio of funds allocaed o he privae secor o gross domesic produc. 4-1- Esimaing he model and inerpreaion of he obained resuls In his secion, firs he reliabiliy of he model variables is esed by using Augmened Dickey Fuller (ADF). The obained resuls of his es are provided in Table 1.
Invesigaion of he effec of he degree of openness of 137 Table 1: The resuls of he uni roo es for he variables of he model The variable s name The value of ADF saisic P-Value The level of he variable The difference of he order of a variable The level of he variable The difference of he order of a variable VREER (logarihm of he -2.993-0.0478 - condiional variance of he real effecive exchange rae) OP (degree of openness) -1.654-5.20 0.443 0.0002 g (he raio of governmen expendiures o gross domesic produc) -2.980-0.0475 - M2g (nominal growh of money and quasi-money) prodg (nominal growh of labor produciviy) Lfd (logarihm of Financial Developmen Index) OP*G (he ineracions beween he degree of openness and he raio of governmen expendiures o gross domesic produc) OP*M2G (he ineracions beween he degree of openness and he nominal growh of money and quasi) OP*PROG (he ineracions beween he degree of openness and he nominal growh of labor produciviy) -3.052-0.04 - -4.065-0.0035 - -2.813-0.0646 - -2.11-5.459 0.24 0.0001-2.138-6.288 0.231 0.000-3.267-0.0251 - As i can be observed from he above able, he null hypohesis canno be rejeced for he reliabiliy es of he variables of degree of openness (OP), he ineracions beween he degree of openness wih he raio of governmen expendiures o gross domesic produc (OP*G) and he ineracions beween he degree of openness wih he nominal growh of money and quasi (OP*M2G). In oher words, he menioned hree variables have a uni roo, and are reliable afer one ime differeniaion.so, by using he ime series daa from he year 1980 o 2012, he auoregressive disribued lag model (ARDL) has been applied o invesigae he relaionships beween variables. In his paper, daa of he model have been colleced from he daabase of Cenral Bank of he Islamic Republic of Iran, World Bank and Unied Naions Conference on Trade and Developmen. The resuls of model esimaion are shown in Table 2. Table 2: The resuls of he esimaion (dependen variable is he logarihm of he volailiy of real Effecive exchange rae (VREER) for he economy of Iran) The explanaory variables The esimaed coefficiens Op -0.1829 C Degree of openness (0.090096) M2g 0.074950 d Nominal growh of money and quasi money (0.12616) Lfd 0.51949 d The logarihm of financial developmen index g The raio of governmen expendiures o gross domesic produc prodg Nominal growh of labor produciviy Ineracion erm * G*op (0.89111) -0.35056 b (0.158617) 0.2239 C (0.10862) -0.0051372 d (0.0037730) 0.032625 b (0.015070) -.0055032 b (0.0020524)
138 A.F.Vash a: he significance of coefficiens a he level of one percen, b: he significance of coefficiens a he level of five percen, c: he significance of coefficiens a he level of en percen, d: he significance of coefficiens a he level of higher han en percen. - The numbers in parenheses are sandard errors. Afer deermining he long erm relaionship beween he variables of he model, based on heoreical foundaions and conduced empirical sudies, o evaluae he speed of adjusing he shor-erm equilibrium error owards longerm equilibrium value, vecor error correcion model for he variable of firs-order difference of he logarihm of real exchange rae volailiy affecing he economy of Iran has been esimaed as shown in Table 3. Table 3: Specificaion of vecor error correcion model for he variable of firs-order difference of he logarihm of real exchange rae volailiy affecing he economy of Iran The variables in he vecor error correcion model The esimaed coefficiens D(VREER (-1)) The firs order difference of lag of he logarihm of real exchange rae flucuaions -0.25053 (0.11686) [-2.143] D(OP) The firs order difference of degree of openness D(G) The firs order difference of he raio of he governmen expendiures o gross domesic produc D(G(-1)) The firs order difference of lag of raio of he governmen expendiures o gross domesic produc D(PRODG) The firs order difference of nominal growh of labor produciviy D(PRODG (-1)) The firs order difference of lag of nominal growh of labor produciviy D(M2G) The firs order difference of nominal growh of money and quasi money D(OP*G) The firs order difference of ineracions of degree of openness wih he raio of governmen expendiures o gross domesic produc D(OP*M2G) The firs order difference of ineracions of degree of openness wih nominal growh of money and quasi money D(OP*PROG) The firs order difference of ineracions of degree of openness wih nominal growh of labor produciviy D(OP(-1)*PRODG (-1)) The firs order difference of lag of ineracions of degree of openness wih nominal growh of labor produciviy D(LFD) The firs order difference of logarihm of Financial Developmen Index ECM The speed of adjusmen and error correcion -0.018135 (0.0065214) [-2.780] -0.10573 (0.037906) [-2.7892] -0.57358 (0.020757) [-2.7633] -0.0077314 (0.0038192) [-2.0244] -0.024516 (0.0028439) [-8.6205] 0.0074313 (0.010819) [0.68690] 0.0024604 (0.0007750) [3.1749] - 0.0003655 (0.0002602) [ -1.404] 0.00008155 (0.0001020) [0.79932] 0.0004059 (0.0000813) [ 4.9917] 0.051508 (0.089752) [ 0.57389] -0.099151 (0.033652) [-2.9463] - The numbers in parenheses show sandard errors and numbers in curly braces show he quaniy of es saisics. The ECM coefficien is a negaive and significan a he level of one percen, and suggess a dynamics of he model from long-erm o shor-erm, and shows ha he 0.0991% of he equilibrium error a any ime period will be correced in he nex period.the resuls of model esimaion are shown in Table 2, as i can be seen, he variable of nominal growh of labor produciviy has a posiive and significan impac on he real effecive exchange rae volailiy in he economy of Iran. The impac of he variables of he logarihm of financial developmen and nominal growh of money and quasi money on real effecive exchange rae volailiy in he economy of Iran, appears unlike he heoreical expecaions and i s no significan.the raio of governmen expendiures o gross domesic produc
Invesigaion of he effec of he degree of openness of 139 can have a posiive or negaive impac on he real exchange rae volailiy, so ha if governmen expendiures rising increases domesic invesmens and srenghens he supply side, he self-sufficiency of he domesic economy could lower he domesic needs of counries o foreign economies in he economic sphere and leads o saving exchange resources and ulimaely greaer sabiliy in he foreign exchange marke. In his paper, for he economy of Iran, he impac of he raio of governmen expendiures o gross domesic produc on he real effecive exchange rae volailiy is significan a he level of 5% and is one percen rising causes 0.350 percen decreasing in real effecive exchange rae volailiy, assuming all oher facors are consan.as migh be expeced, according o he heory of Obsfeld - Rogoff (1996-1995) he effec of degree of openness of he real exchange rae volailiy is negaive and significan a he 10% level. So ha one percen increase in he degree of openness causes -0.182 percen reducion in he real effecive exchange rae volailiy. Also he ineracion effec of degree of openness and nominal growh of labor produciviy on he real exchange rae volailiy is negaive and significan a he 5% level. In fac, in more open economies, he overall level of prices are more flexible and a faser channel is provided for reforming he overall domesic price level. Therefore he domain of real effecs of nominal and real shocks on he real exchange rae will be reduced. Closed economies are excluded from more flexibiliy in he overall price level and herefore, and by assuming all oher condiions being consan, he effecs of shocks is higher on he real exchange rae. However, he ineracion effec of degree of openness and he raio of governmen expendiures o gross domesic produc on he real exchange rae volailiy is posiive and significan and is ineracion effec wih nominal growh of money and quasi-money on he real exchange rae volailiy is insignifican. CONCLUSION In his paper, he influence of some nominal and real facors on he real effecive exchange rae volailiy has been invesigaed in he economy of Iran and he Auo Regressive disribued lag economeric mehod (ARDL) as an effecive economerics mehod has been used for he sudy of his issue in he aricle.the resuls of This paper shows ha in open economies, he susainabiliy of he sraegy of openness of he economy helps o adjus exchange rae volailiy. The findings of his research wih are coinciden wih he heory of Obsfeld - Rogoff (1996-1995) and sugges ha more open economies have he real exchange rae wih less volailiy. In fac open economies provide he channels for faser reform of he domesic overall price level and decrease any kind of money supply effecs or real shocks on he real exchange rae. Closed economies wih low flexibiliy of he general price due o he low conribuion of impors are deprived his flexibiliy of ransfers and he general price. Therefore by assuming he oher condiions are consan, he effecs of shocks are higher on real exchange rae. Also open economies usually use managed floaing exchange regime and his regime is a deerren o creae moneary and currency crisis. Alhough developing counries may face wih some coss in shor erm due o reforming rade policies and adoping open-door economic policies, bu in he long erm hey will benefi from is ineress o conrol moneary and currency crisis. Alhough in his paper, he impac of governmen expendiure on real exchange rae volailiy was negaive and significan, bu more governmen inervenion and ousourcing in he economy may have oher negaive consequences. Thus sabilizing he exchange marke and proecing i from he negaive consequences of exchange rae volailiy, requires adoping an open door policy by economies.
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