An Analysis of the Factors Influencing Currency Depreciation in Iran

Abstract

This study aims to examine the determinants of currency depreciation in Iran over the period 1979–2018. This research utilizes time-series data and the Johansen–Juselius cointegration method. The model includes key macroeconomic variables such as exchange rate, liquidity, budget deficit, investment, oil revenues, and balance of payments deficit. After testing the stationarity of the variables, the Toda–Yamamoto causality test and an error correction model (ECM) were used to analyze both long-term and short-term relationships. The findings reveal that liquidity, budget deficit, and balance of payments deficit have a positive and significant effect on the exchange rate (indicating depreciation of the national currency). Conversely, investment and oil revenues exhibit a negative and significant impact, implying their role in strengthening the national currency. The adjustment coefficient in the ECM is –0.80, indicating that 80% of deviations from the long-run equilibrium are corrected within one period. The Toda–Yamamoto causality results confirmed causal relationships from all independent variables to the exchange rate at a 95% confidence level. The study concludes that currency depreciation in Iran is primarily driven by internal macroeconomic imbalances, particularly the expansion of liquidity, persistent budget deficits, and reduced investment. On the other hand, increased oil revenues play a compensatory role in stabilizing the national currency. Therefore, coordinated economic policies targeting fiscal discipline, investment promotion, and monetary control are essential for maintaining currency stability.