An Investigation of the Long-Term Impact of Exchange Rate Uncertainty on the Growth of Industrial Production: FMOLS and DOLS Approaches

Document Type : Scientific paper

Author

Assistant Professor of Economics, Department of Economics, Payam-e-Noor University, Tehran.

Abstract

Inflation and exchange rates are among the most important variables affecting the economy of any country. At high rates, they may have detrimental effects on the country's economy due to uncertainty of their extent in the future. Therefore, the main purpose of this study is to investigate the long-term effect of inflation and exchange rate uncertainties on industrial production. For this purpose, the generalized autoregressive conditional heteroscedasticity (GARCH) approach was used to estimate the uncertainties. In addition, to estimate the model analysis, the Fully Modified Least Squares (FMOLS) and Dynamic Ordinary Least Squares (DOLS) methods were used for the years 1979 to 2017. First, to investigate the stability test and prevent false regression between variables, the generalized Dickey-Fuller unit root test was used, the result of which indicates the stability of all variables except the logarithm of inflation uncertainty. Then, using the Johansen Juselius co-integration test, the long-run relationship between the variables was evaluated, based on which the existence of a long-term relationship between the variables has been confirmed. The results show the negative effect of inflation uncertainty and exchange rate uncertainty on industrial production. Government expenses also had a negative impact on the industrial production. Also, the capital stock of the industrial sector and the labor force working in this sector have been able to increase the production of the industrial sector.

Keywords

References

 
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Macroeconomics Research Letter
Volume 15, Issue 30
January 2021
Pages 252-271

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History

  • Receive Date: 02 April 2021
  • Revise Date: 27 June 2021
  • Accept Date: 10 August 2021

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