Remarks on nominal depreciation of the national currency in order to support domestic production and exports

In the post-Islamic Revolution years, controlling inflation and, at some points, maintaining balance in government budgets have been the most important economic objectives determining foreign exchange rate in Iran; an approach which, by reducing the real foreign exchange rates (which was tantamount to reducing the domestic competitiveness), has had negative implications for the domestic production and trade balance of the country, and which has in deed not promoted the country's production and export goals.

Accordingly, designing and implementing an appropriate foreign exchange rate mechanism aiming at supporting production and exports (through improving trade balance) is essential. Moreover, the current state of the country's economy requires the mobilization of effective demand through exports and makes possible the achievement of single-digit inflation and the adjustment the nominal exchange rate based on the difference between domestic and external inflation with the least side effects. In order to mobilize production and exports, and to avoid the repetition of foreign exchange shocks in the future, It is suggested that the nominal exchange rate be adjusted proportionate to the difference between domestic and foreign inflation (based on the theory of purchasing power parity) so as to prevent real foreign exchange rate from declining.

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