Irans Regional Trade and Real Exchange Rate (Gravity Panel Data Models)

This study analyzes the relationship between bilateral trade and regional trade and increase in the Rials real exchange rate on this trade by using the gravity model. The analysis is based on panel data covering separately bilateral trade and regional exports and imports between Iran and 45 Asian countries from 2001 to 2011. The first analysis is based on Pooled EGLS Fixed Effect Model and the second analysis utilizes the pooled EGLS Random Effect Model.The results from the two approaches show that Irans trade balance is positively related to regional trade and Irans imports and exports increased by 6.4%,16% for every 10% increase in GDP in the 45 Asian countries. The effect of increase in Rials real exchange rate is asymmetric and tends to increase imports and reduce exports. This means that 10% increase in the Rials real exchange rate increases 7.1% of regional imports and reduces 16% of regional exports. We conclude that increase in the regional trade with all regional blocs in Asia leads to increase in Irans foreign trade and an increase in the Rials real exchange rate reduces trade imbalance for Iran.