Payame Noor University Economic Growth and Development Research 2228-5954 10 37 2019 12 22 The Impact of Inflation Volatility on the Relationships between the Iranian Trade Balance with the Exchange Rate: Non-linear Approach The Impact of Inflation Volatility on the Relationships between the Iranian Trade Balance with the Exchange Rate: Non-linear Approach 51 64 4689 10.30473/egdr.2019.4689 FA Hana Abolhasanbeigi Ph.D. Student in International Economics, Tabriz University, Tabriz, Iran Alireza Kazerooni Professor at Department of Economics, Tabriz University, Tabriz, Iran Mahdi Barghi Oskooee Associat Professor at Department of Economics, Tabriz University, Tabriz, Iran Hossein Asgharpur Professor at Department of Economics, Tabriz University, Tabriz, Iran Journal Article 2018 02 21 Inflation volatility is one of the characteristics of Iranian economy over the past four decades. Inflation volatility by creating macroeconomic instability can affect the relation of economic variables. The purpose of this study is the evaluation of the impact of nonlinear inflation volatility on the relationships between the Iranian trade balance with the exchange rate during the 1973-2016. <br />For this purpose, firstlyinflation volatility by using EGARCH method has been estimated and the model was estimated by Markov-switching model. The results show that the behavior of trade balance in Iran can be divided in 3 regimes (high, medium and low trade deficit). Increased exchange rate has induced the improvement of trade balance in 3 regimes. The effect of inflation volatility on the relationship of exchange rate to trade balance in the high and medium trade deficit regime is insignificant. Whereas in the regime 3 (low trade balance deficit) is negative and significant. So that in the regime 3(low trade deficit) inflation volatility has caused to debilitation of exchange rate effect on the trade balance and with the increase in inflation volatility exchange rate effect on the trade balance is further debilitation. Inflation volatility is one of the characteristics of Iranian economy over the past four decades. Inflation volatility by creating macroeconomic instability can affect the relation of economic variables. The purpose of this study is the evaluation of the impact of nonlinear inflation volatility on the relationships between the Iranian trade balance with the exchange rate during the 1973-2016. <br />For this purpose, firstlyinflation volatility by using EGARCH method has been estimated and the model was estimated by Markov-switching model. The results show that the behavior of trade balance in Iran can be divided in 3 regimes (high, medium and low trade deficit). Increased exchange rate has induced the improvement of trade balance in 3 regimes. The effect of inflation volatility on the relationship of exchange rate to trade balance in the high and medium trade deficit regime is insignificant. Whereas in the regime 3 (low trade balance deficit) is negative and significant. So that in the regime 3(low trade deficit) inflation volatility has caused to debilitation of exchange rate effect on the trade balance and with the increase in inflation volatility exchange rate effect on the trade balance is further debilitation. https://egdr.journals.pnu.ac.ir/article_4689_edb9015d5009a0a1660ad22f52ca0b63.pdf