The Monetary Model of Exchange Rate in Iran Economy: an Autoregressive Distributed Lag (ARDL) Approach

The purpose of this paper is to test the monetary model of exchange rate in Iran, using an Autoregressive Distributed Lag (ARDL) approach over the period 2000 to 2012, using Eviews software. The estimation results show that there is long run relationship among variables of the monetary model of exchange rate for Iran. That is, the estimated coefficients of the money supply, income and interest rate differentials support the monetary exchange rate model. As well, the stability test of CUSUM shows that there exists a significant and stable monetary model of exchange rate determination for Iran. Therefore, this study recommends that market participants in the foreign exchange market may monitor and forecast future exchange rate movements using the money supplies, incomes and interest rates variables.