Impulse Response Analysis of the Effects of Asymmetric Exchange Rate Shocks on the Consumer Price Index in Iran

Abstract

Objective: This study aims to analyze the effects of asymmetric exchange rate shocks (positive and negative) on the Consumer Price Index (CPI) in Iran during the period from 1990 to 2022. Methodology: This applied research utilized time-series data from Iran over the period 1990–2022. The analysis was conducted using the Vector Error Correction Model (VECM), Impulse Response Function (IRF), and Forecast Error Variance Decomposition (FEVD). The main variables included exchange rate (positive and negative shocks), CPI, import price index, money supply, and global oil prices. Data were obtained from international sources such as the World Bank, International Monetary Fund, and Federal Reserve. Findings: The impulse response analysis revealed that a positive exchange rate shock leads to an increase in the CPI, while a negative shock results in a decrease, in both the medium and long term. The variance decomposition results showed that, in the long run, positive and negative exchange rate shocks explain 13.92% and 18.50% of CPI changes, respectively—making them the most influential factors among the examined variables. Conclusion: There is a direct and statistically significant relationship between asymmetric exchange rate shocks and the CPI in Iran. Increases in the exchange rate drive up consumer prices, whereas decreases reduce them. This relationship remains stable over the medium and long term and should be carefully considered in monetary policymaking.