Appropriate Short-Term Policies to Overcome the Foreign Exchange Crisis

Abstract

During last years, there have been widespread investigations on foreign exchange rate and its problems, indicating the importance of foreign exchange rate as a key factor in an open economy. This rate influences many types of macroeconomic variables such as import, export, inflation, interest rate and governmental policies and economic decisions. Therefore, nowadays, it is a fundamental goal for governments to control the foreign exchange market. In this regard, the main hypothesis of our model is that Iran's economy is in foreign exchange crisis. And after proposing a new method for modeling of demand for money by using pressure index to foreign exchange market; some suggestions have been brought to control the foreign exchange crisis. Of course, regarding our research results, if central bank policies do not change stocks of foreign exchange, then foreign exchange rate fluctuations would not affect the currency market turbulence index.

Keywords: Exchange rate, Portfolio, Foreign exchange crisis, Short-term policies, Money demand