Markov-switching analysis of exchange rate pass-through: Sugar Price in Iran

Due to its inherent role in ensuring food security and as one of the productive sectors of the economy, the agricultural sector has a priority in receiving preferential currency. Having a preferred currency has caused the price of this commodity in the market to be multi-valued. On the other hand, the allocation of billions of dollars at a price lower than the free market price of foreign exchange to imports makes the percentage of the effect of the preferred currency on the price of commodities more important. In such circumstances, it must be determined whether the allocation of preferential or bank currency (42000Rials) to sugar has been able to be transferred to the final price of this commodity. To answer this question, time series data with monthly frequency of domestic sugar prices, official exchange rates and world prices during the years 2011: 03-2019:11 and the nonlinear pattern of Markov MSIAH regime change have been used. The results showed that during the period 2011:03-2019:11, the average monthly growth rate of the price of this product was equal to 1.5 percent. Meanwhile, during the period of implementation of the preferential exchange rate policy, the average monthly price growth rate was equal to 2.7 percent. The results also show that in the short run, the exchange rate pass-through to sugar price in the second regime was significant and equal to 5%. In the long run, the exchange rate pass-through in this regime was equal to six percent.