The Effects of Short and Long-Run Exchange Rate Shocks on Trade Balance of Iran (a VECM Approach for Testing J-Curve)

In this paper, the Vector Error Correction Model (VECM) analysis, and quarterly series of statistics in the behavior of Iran's trade-balance against its main Trade partners have been dynamically analyzed and real effective exchange rate (REER) has been calculated as an important index and a determinant in the country's trade-balance fluctuations. The results indicate a long-run equilibrium among variables of the aggregate trade-balance pattern. The dynamic effects among variables, based on impulse-response functions (IRFs) were analyzed as a result, the effect of devaluation on aggregate trade-balance in short-run confirms J-curve hypothesis. The decline trend for J-curve in the research has been estimated for two quarters of which nominal rigidity of import values in the international trade-balance, i.e, dependency of domestic sector on imports and inelastic real exchange rate on non-oil export sector are of its crucial reasons.