Investigating the Impact of Exchange Rate Uncertainty on Inflation and Interest Rate Uncertainty and the Role Monetary and Fiscal Policy Credibility on it: Application of BEKK-VECH-VAR Methods

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Shalyari Farzaneh; Armen Seyyed Aziz; Salahmanesh Ahmad

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Journal Paper

Paper Information

Journal: JOURNAL OF APPLIED ECONOMICS STUDIES IN IRAN Year:2022 | Volume:11 | Issue:43 Page(s): 9-37

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Title

Investigating the Impact of Exchange Rate Uncertainty on Inflation and Interest Rate Uncertainty and the Role Monetary and Fiscal Policy Credibility on it: Application of BEKK-VECH-VAR Methods

Author(s)

Shalyari Farzaneh | Armen Seyyed Aziz | Salahmanesh Ahmad | Issue Writer Certificate

DOI

https://doi.org/10.22084/aes.2022.25294.3372

Keywords

Exchange Rate Uncertainty

Inflation Rate Uncertainty

Interest Rate Uncertainty

Monetary and Fiscal Policy Credibility

Abstract

Take a look at the trend of macroeconomic variables such as exchange rate and inflation in Iran, shows that these variables have had a relatively Instable trend in recent years. However, the effects of the uncertainty of these variables and their interactions have received very little attention in the country. Therefore, this study investigating the impact of exchange rate uncertainty on inflation and interest rate uncertainty and the role monetary and fiscal policy credibility on it using quarterly data during the period 1991-2019. For this purpose, initially using the three-variable VECH and BEKK methods, uncertainty in the variables is estimated. The results show that BEKK method is more suitable for estimating uncertainty than VECH method. Then using the VAR structure, Investigating the Impact of Exchange Rate Uncertainty on Inflation and Interest Rate Uncertainty and the Role Monetary and fiscal policy credibility on it. The results show that exchange rate uncertainty and inflation rate uncertainty affect each other. Also, exchange rate uncertainty and interest rate uncertainty intensify each other. Rising interest rates increase interest rate uncertainty and rising inflation increases inflation uncertainty. This result means the confirmation of the Friedman-Ball hypothesis and the rejection of the Pourgerami and Maskus hypothesis. The results also show that the credit of monetary and fiscal policies reduces the effect of exchange rate uncertainty on interest rate uncertainty and inflation.

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