Conventional wisdom states that currency depreciation in
oil-producing countries are contractionary because demand effects,
limited by the prevalence of oil exports priced in dollars, are
more than offset by adverse supply effects. Iran, however, has
experienced a rapid increase in non-oil exports in the last decade.
Against this background, the paper tests whether the conventional
wisdom still applies to Iran and concludes that the emergence of
the non-oil export sector has made currency depreciation
expansionary. The expansionary effect is particularly evident with
respect to anticipated persistent depreciation in the long-run.
Notwithstanding the varying effects of exchange rate fluctuations
on the demand and supply sides of the economy, managing a flexible
exchange rate gradually over time towards achieving stability in
the real effective exchange rate may strike the necessary balance.
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