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The paper analyses the main determinants of the real exchange rate in IRAN. The study employs simultaneous co-integrated system in estimating the long-run
determinants of the real exchange rates for imports and exports followed by
structural VECM which provides a practical approach to incorporating long run
structural relationship. The finding is that resource balance(capital flows),
productivity, tariff and nominal exchange rate influence the real exchange rate for
imports and exports in the long-run. Besides the difference of the fundamentals
mentioned above, fiscal balance and money supply are found to impart short-run
effects on the real exchange rate indices. Our results confirm that resource balance is
the main source of real exchange rate fluctuation. The coefficients of adjustment are
found to be -0.24 and -0.38 respectively for the real exchange rates for imports and
exports.
JEL Classification: C32, F31, 055.