Dynamic Analysis of the Effects of Exchange Rate Volatility, Financial Development, and Trade Openness on Economic Growth in Iran: A TVP-VAR Approach

Abstract

Over recent decades, Iran’s economy has faced significant challenges, including international sanctions, severe exchange rate fluctuations, and high inflation rates, all of which have the potential to drastically alter the trajectory of economic growth. This study investigates the dynamic impacts of exchange rate volatility, financial development, trade openness, and inflation on Iran's economic growth over the monthly period from 2011 to 2024, using a Time-Varying Parameter Vector Autoregressive (TVP-VAR) model. This nonlinear approach is adopted due to the limitations of linear models in capturing such complex dynamics. The findings reveal that both exchange rate volatility and financial development exert a negative and statistically significant impact on economic growth, whereas trade openness contributes positively over the long term. Inflation is also found to have a detrimental long-run effect on growth. In the short run, economic growth responds asymmetrically to these variables across different time periods. These results underscore the necessity for policymakers to account for such asymmetric effects when designing and implementing economic policies, especially in contexts affected by currency shocks and sanctions.