Document Type : ORIGINAL ARTICLE

Author

• Saleh Taheri Bazkhaneh

Assistant Professor, Faculty of Management and Economics, University of Guilan, Rasht, Iran.

Abstract

Following the 2008 global financial crisis, the relationship between economic policy uncertainty (EPU) and exchange rate dynamics has garnered significant attention. In Iran, this nexus is particularly complex due to structural shocks and extensive interventions. This study employs a Continuous Wavelet Transform (CWT) to analyze quarterly data from 1980:Q1 to 2024:Q2, dissecting the dynamic relationship across various time-frequency domains.
The findings reveal that in the short run (less than 1 year), a strong, in-phase feedback loop exists between EPU and the exchange rate, where each variable reinforces the other. In the medium run (1–4 years), the relationship becomes more intricate; alongside the persistent in-phase causality, an inverse relationship from the exchange rate to EPU emerges, indicating adaptive economic responses. In the long run (more than 4 years), a stable and unidirectional inverse causality from the exchange rate to EPU is observed. This time-horizon decomposition is based on the standard wavelet analysis literature, distinguishing between business, cyclical, and long-term components.
This finding confirms that artificially suppressing the exchange rate as a stabilization tool is counterproductive, as it merely shifts policy uncertainty to longer horizons, thereby contradicting its objective.

Keywords

• Policy Uncertainty
• Monetary Economics
• Wavelet Analysis
• Iran’s Economy

Main Subjects

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