Investigation of Effect of permanent and temporary exchange rate and liquidity shocks on business cycle of Iran. Blanchard Quah approach

One of the largest ports in the country\ʹs foreign exchange comes from oil exports .Therefore, investigation of exchange rate fluctuation has been always considered by policy makers. Additionally, exchange rate and liquidity, as variables which affect economic growth can affect the business cycle. In this regards, the aim of this paper is to investigate the relationship between permanent and temporary exchange rate and liquidity shocks with business cycles of Iran. To separate shocks, we used Blanchard Quah econometric techniques. The results indicate that in the long run term, marginal consumption of households have greatest impact on the business cycle than other variables; moreover, by raising the marginal consumption of households and oil revenues, business cycle fluctuations will be moderated. But by increasing investment in Iran, business cycle fluctuations will be greater. The increasing of exchange rate in the long term has adjustment effect on the business cycle while increasing of liquidity will exacerbate business cycle fluctuations. Permanent liquidity shocks and temporary exchange rate shocks are recognized as main causes of business cycle fluctuations.