The Impacts of Oil Revenues on the Exchange Rate Using the FMOLS Method: Case study IRAN

Aziznejad, Samad

doi:10.22050/pbr.2025.542168.1404

The Impacts of Oil Revenues on the Exchange Rate Using the FMOLS Method: Case study IRAN

Document Type : Original Article

Author

Samad Aziznejad

Assistant Professor, Department of Economics Parliamentary Research Center Tehran Iran

https://doi.org/10.22050/pbr.2025.542168.1404

Abstract

The exchange rate in Iran’s economy, is one of the most critical indicators influencing fiscal, trade, and monetary policymaking. Given that a substantial portion of the country’s foreign exchange earnings is dependent on crude oil exports, any fluctuations in oil revenues can directly or indirectly affect the exchange rate. This relationship becomes especially significant under circumstances such as international sanctions, global oil price volatility, and the structural dependency of the government budget on oil revenues. Consequently, a precise understanding of the mechanisms by which oil income influences the exchange rate is essential for designing sustainable currency policies and ensuring the country’s macroeconomic stability. The present study investigates the long-term relationship between oil revenues and the exchange rate in Iran during the years 2002 to 2024, utilizing the Fully Modified Ordinary Least Squares (FMOLS) econometric method. Through the analysis of quarterly time series data and unit root tests, the stationarity and then cointegration of the variables were examined. The test results indicate that the variables are integrated of order one, and a cointegration relationship exists among them, justifying the estimation of the model using FMOLS.The findings reveal that, according to the model estimates, oil revenues and non-oil exports exert a significant negative effect on the exchange rate. Specifically, a one-percent increase in oil revenues leads to a 0.41 percent decrease in the exchange rate (signifying an appreciation of the Rial), while an increase in non-oil exports results in a 0.72 percent decrease in the exchange rate.

Highlights

· There is a significant long-term relationship between oil revenues and the exchange rate.

· Non-oil exports, with a significant coefficient, indicate that a one percent increase in non-oil exports reduces the exchange rate by 0.72 percent, thereby strengthening the rial.

· These findings underscore the necessity of reducing dependence on oil revenues and optimizing foreign exchange management to stabilize the exchange rate.

Keywords

Oil Revenues

Exchange Rate

FMOLS

Non-Oil Exports

Global Oil Price

Subjects

Accounting

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