The Effects of Devaluation of Irans Balance of Payments

Devaluation has different effects on the structure of trade patterns in countries which have a fixed exchange rate regime. The experience of devaluation in many countries has clearly shown that devaluation policies have not always led to the improvement of their trade pattern structures. Some empirical studies have revealed that after employing devaluation, the real rate of money in some nations temporarily declined and then was neutralized over time. In some instances, the practice has led to an appreciation of the real rate of money. An empirical investigation of the Iranian trade model shows that, devaluation will lead to an improvement of Iranian trade patterns. Its results reveal that devaluation lends to increase exports and decrease the demand for imports. It has also shown that within Iranian economic structure, an exportation of non-oil commodities depends more upon a money base than an exchange rate. This reveals that the elasticity of export function is low relative to the changes in the real exchange rate. Therefore, one can conclude that a devaluation policy will not effect the exportation of non-oil commodities in any drastic manner. Furthermore, the results of the adjusted Marshall-Lerner condition reflect that devaluation will lead to an improvement in the Iranian trade deficits.