The Effects of Real Exchange Rate Shocks on Energy Intensity: Case of Iran

The real exchange rate indicates the ratio of the price of tradable goods to the price of non-tradable goods and is one of the key indicators in the Iranian economy that has undergone significant leaps in recent years. In the present study, the effects of real exchange rate shocks on energy intensity (as one of the important economic-environmental indicators) of Iran's economy is investigated with recognising four mechanisms: price effect (relative energy price change), scale effect (change in economic volume), composite effect (change in mix of economic activities) and technical effect (change in productivity). By modelling the empirical model by Structural Vector Autoregressive method with data from 1974-2016 period, the results show that increasing the real exchange rate reduces energy intensity from the price effect and the scale effect channel, while its technical effect increases the energy intensity. Also, there is no significant composite effect. Finally, due to the dominant positive technical effect, the impact of the real exchange rate on the energy intensity was positive during the sample period, and as an outcome, the energy intensity would increase by decreasing the real value of the rial, ceteris paribus. This result can be due to the increase in the relative price of energy-efficient equipment and technologies (which are mainly imported goods, for both consumers and producers), as well as the increase in energy smuggling, which lead to increase the energy intensity.