Non-linear Response of Inflation: A Real Effective Exchange Rate in Iran

Exchange rate is a variable transferring international economic shocks to domestic economy. In countries like Iran who are experiencing a high inflation and whose GDP as well as consumption expenditures are mostly dependent on imports and foreign capital flows, exchange rate changes and its effects needs to be carefully monitored by policy makers and economic researchers. The purpose of the present paper is to measure a nonlinear model estimating the response of inflation to Real Effective Exchange Rate (REER) in Iran. The finding based on the time series data for the period 1971-2017 and a Threshold Regression (TR) model indicates that a Real Effective Exchange Rate (REER) of 6160.27 Rials has been applied as a threshold value. In other words, based on the above threshold value, the estimated model shows exchange rate coefficient has increased somewhat from the first to the second regime.