Evaluating the Causal Relationship Between Exchange Rate and Its Volatility with the Misery Index in Iran
Keywords:
Causality test under structural breaks, Fourier approximation, Misery index, Exchange rateAbstract
The misery index is a key indicator for assessing a society's economic condition and its impact on public welfare. An increase in this index signals an intensification of economic problems that affect the well-being of individuals. Consequently, the misery index functions as an important tool for policymakers to adopt appropriate decisions aimed at improving economic conditions. Particularly during periods of crisis and economic recession, this index serves as a warning signal, highlighting the urgent need for corrective policy measures. One of the variables influencing the misery index is the exchange rate. Given the significance of the misery index and recent exchange rate surges in recent years, the present study evaluates the causal relationship between the exchange rate and its volatility with the misery index over the period from Spring 2001 to Summer 2024. Considering the numerous economic fluctuations in the country and the likelihood of structural breaks, the study employs the Fourier approximation to account for structural breaks in the stationarity tests of the variables, cointegration, and causality tests. In addition, the GARCH method is used to estimate exchange rate uncertainty for the purpose of examining the causal relationship between exchange rate uncertainty and the misery index. The results indicate a unidirectional causal relationship from the exchange rate to the misery index and a bidirectional causal relationship between exchange rate uncertainty and the misery index. Therefore, exchange rate instability can have damaging effects on the economic welfare of the population (misery index). Since external shocks primarily influence the national economy—and subsequently inflation and unemployment—through the exchange rate and its fluctuations, it is essential to prioritize the monitoring and forecasting of such shocks and the use of tools that can enhance the resilience of the domestic economy against them.
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