Substitution of anchor currency: challenges for trade between Iran and its major trading partners
Abstract
The aim of the paper is to find out whether euro is a convenient substitution for U.S. dollar as an anchor currency for Iranian rial and whether this replacement would affect Iran’s international trade positively. We explore these effects via Optimum Currency Area (OCA) theories using generalized least square from 2000 to 2018. Based on OCA index, euro would be a good substitution for U.S. dollar as an anchor for Iranian rial. In addition, gravity model and Generalized Method of Moments estimation confirm that substitution of U.S. dollar by euro would improve bilateral trade between Iran and its major trade partners especially the European Economic and Monetary Union (EMU). Furthermore, we confirm that a basket containing main currencies (euro, U.S. dollar, yuan, Russian rubble) would be more efficient than a single currency anchor however euro should be prominent in the basket. Such a change of anchor could positively contribute to reduction of transaction costs, diversification of external risk, rise of mutual trade exchanges between Iran and the EMU or the EU and consequent economic growth of trade partners. The paper contributes to the existing literature by comprehensive methodological approach how to identify an appropriate anchor currency.
First published online 2 June 2021
Keyword : euro anchor, currency basket, international trade, OCA theory
How to Cite
Zahmani, Z., Jovović, M., Redzepagić, S., & Siničáková, M. (2021). Substitution of anchor currency: challenges for trade between Iran and its major trading partners. Technological and Economic Development of Economy, 27(4), 833-851. https://doi.org/10.3846/tede.2021.14977
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
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Kenen, P. (1969). The optimum currency area: an eclectic view. In R. Mundell, & A. Swoboda (Eds.), Monetary problems of the international economy. University of Chicago Press.
Kose, M. A., & Yi, K.-M. (2002). The trade-comovement problem in international macroeconomics (Federal Reserve Bank of New York Staff Report No. 155). https://doi.org/10.2139/ssrn.368201
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McCauley, R. N. (1999). The euro and the dollar, 1998. Open Economies Review, 10(1), 91–133. https://doi.org/10.1023/A:1008309213136
McKinnon, R. I. (1963). Optimum currency areas. American Economic Review, 53(4), 717–725.
Mundell, R. A. (1961). A Theory of optimum currency areas. American Economic Review, 51, 657–665.
Nguyen, B. X. (2010). The determinants of Vietnamese exports: static and dynamic panel gravity approaches. International Journal of Economics and Finance, 2(4), 112–129. https://doi.org/10.5539/ijef.v2n4p122
Ohno, K. (1999, January). Exchange rate management in developing Asia (Working Paper No. 1). Asian Development Bank Institute.
Plumper, T., & Neumayer, E. (2011). Fear of floating and de facto exchange rate pegs with multiple key currencies. International Studies Quarterly, 55, 1121–1142. https://doi.org/10.1111/j.1468-2478.2011.00686.x
Sauder. (2020). Pacific exchange rate service. Sauder School of Business. Retrieved January 7, 2020, from http://fx.sauder.ubc.ca/
Sriyana, J., & Afandi, A. (2020). Asymmetric effects of trade openness on economic growth in selected Asean countries. E+M Ekonomie a Management, 23(2), 66–82. https://doi.org/10.15240/tul/001/2020-2-005
Thanarerk, T. (2016). Optimal currency area and anchor currency in Southeast Asia. International Journal of Economics and Business Research, 12(3), 233–248. https://doi.org/10.1504/IJEBR.2016.080333
United Nations Conference on Trade and Development. (2020). Retrieved January 10, 2020, from https://unctadstat.unctad.org
Urbanovsky, T. (2015). Factors behind the Russian ruble depreciation. Procedia Economics and Finance, 26, 242–248. https://doi.org/10.1016/S2212-5671(15)00827-8
Wondesen, T. B., & Mersha, F. G. (2019). A dynamic panel gravity model application on the determinant factors of Ethiopia’s coffee export performance. Analysis of Data Science, 6(4), 787–806. https://doi.org/10.1007/s40745-019-00198-4
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Xu, J. (2011). The optimal currency basket under vertical trade. Journal of International Money and Finance, 30(7), 1323–1340. https://doi.org/10.1016/j.jimonfin.2011.07.002
Arellano, M., & Bover, O. (1995). Another look at the instrumental variable estimation of error component’s models. Journal of Econometrics, 68(1), 29–51. https://doi.org/10.1016/0304-4076(94)01642-D
Baig, T. (2001). Characterizing exchange rate regimes in post-crisis East Asia (Working Papers No. 01/152). International Monetary Fund. https://doi.org/10.5089/9781451857092.001
Baran, J., & Witzany, J. (2018). Analysing cross-currency basis spreads. Ekonomický časopis (Journal of Economics), 66(10), 1002–1030. http://cejsh.icm.edu.pl/cejsh/element/bwmeta1.element.cejshd17b3854-8ab8-4de2-82b4-aab14eb6a1bd
Barseghyan, G., & Baghdasaryan, V. (2019). Optimum currency area theory: evidence from post-Soviet countries and implications for Eurasian Economic Union. Post-Communist Economies, 31(3), 301–324. https://doi.org/10.1080/14631377.2018.1537734
Bayoumi, T., & Eichengreen, B. (1997). Ever closer to heaven? An optimum-currency-area index for European countries. European Economic Review, 41(3–5), 761–770. https://doi.org/10.1016/S0014-2921(97)00035-4
Bénassy-Quéré, A., & Lahrèche-Révil, A. (1998). Pegging the CEECs Currencies to the Euro (Working Papers No. 1998-04). CEPII Research Center.
Blundell, R., & Bond, S. (1998). Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics, 87(1), 115–143. https://doi.org/10.1016/S0304-4076(98)00009-8
Broz, T. (2005). The theory of optimum currency areas: a literature review. Economic Trends and Economic Policy, 15, 53–78.
Central Bank of Iran. (2020). Retrieved January 7, 2020, from https://www.cbi.ir/
Cincibuch, M., & Vavra, D. (2001). Toward the European Monetary Union: a need for exchange rate flexibility? Eastern European Economics, 39(6), 23–63. https://doi.org/10.1080/00128775.2001.11041005
Cordesman, H. A., Bradley, B., D’Amato, J., & Gagel, A. C. (2011). U.S. and Iranian strategic competition, the sanctions game: energy, arms control, and regime change. Washington DC. https://www.csis.org/analysis/us-and-iranian-strategic-competition-sanctions-game-energy-arms-control-andregime-change
Devereux, M. B., & Lane, P. R. (2003). Understanding bilateral exchange rate volatility. Journal of International Economics, 60(1), 109–132. https://doi.org/10.1016/S0022-1996(02)00061-2
Eichengreen, B. (2006). China’s exchange rate regime: the long and short of it. University of California, Berkley.
Fischer, C. (2016). Determining global currency bloc equilibria: An empirical strategy based on estimates of anchor currency choice. Journal of International Money and Finance, 64, 214–238. https://doi.org/10.1016/j.jimonfin.2016.02.019
Frankel, J., & Wei, S.-J. (Eds.). (1994). Yen bloc or dollar bloc? Exchange rate policies of the East Asian economies. In Macroeconomic linkage: savings, exchange rates and capital flows (pp. 295–329). Chicago.
Frankel, J., & Wei, S.-J. (1995). Can regional blocs be stepping stones to global free trade? International Review of Economics and Finance, 5(4), 339–347. https://doi.org/10.1016/S1059-0560(96)90021-0
Frankel, J., & Rose, A. K. (1998). The endogeneity of the optimum currency area criteria. The Economic Journal, 108(449), 1009–1025. https://doi.org/10.3386/w5700
Frankel, J., Schmukler, S., & Serven, L. (Eds.). (2000). Verifiability and the vanishing intermediate exchange rate regime. In S. Collins, & D. Rodrik (Eds.), Brookings Trade Forum 2000. Brookings Institution. https://doi.org/10.3386/w7901
Frankel, J., & Wei, S.-J. (2007). Assessing China’s exchange rate regime. Economic Policy, 51, 575–614. https://doi.org/10.3386/w13100
Fratianni, M., Hauskrecht, A., & Maccario, A. (1998). Dominant currencies and the future of the euro. Open Economies Review, 9, 467–492. https://doi.org/10.1023/A:1008312820408
Freitag, S. (2010). Choosing an anchor currency for the pacific (CEGE Discussion Paper No. 112). https://doi.org/10.2139/ssrn.1686972
Frydrych, J., & Burian, S. (2017). OCA indexes and convergence process in Europe. Scientific Annals of Economics and Business, 64(2), 187–197. https://doi.org/10.1515/saeb-2017-0012
Horvath, R., & Komarek, L. (2002). Optimum currency area theory: an approach for thinking about monetary integration (Warwick Economic Research Papers No. 647). The University of Warwick.
Jamali, G., Asl, E. K., Zolfani, S. H., & Šaparauskas, J. (2017). Analysing LARG supply chain management competitive strategies in Iranian cement industries. E+M Ekonomie a Management, 20(3), 70–83. https://doi.org/10.15240/tul/001/2017-3-005
Kenen, P. (1969). The optimum currency area: an eclectic view. In R. Mundell, & A. Swoboda (Eds.), Monetary problems of the international economy. University of Chicago Press.
Kose, M. A., & Yi, K.-M. (2002). The trade-comovement problem in international macroeconomics (Federal Reserve Bank of New York Staff Report No. 155). https://doi.org/10.2139/ssrn.368201
Kueh, Y. Y. (2002). The interplay of the “China Factor” and US dollar peg in the Hong Kong economy. The China Quarterly, 170, 387–412. https://doi.org/10.1017/S0009443902000244
Krugman, P. (1993). Lessons of Massachusettes for EMU. In F. Giavvazzi, & F. Torres (Eds.), The transition to economic and monetary union in Europe (pp. 241–261). Cambridge University Press. https://doi.org/10.1017/CBO9780511599231.016
Krugman, P., Obstfeld, M., & Melitz, M. J. (2010). International economics: theory and policy (10th ed.). Pearson.
McCauley, R. N. (1999). The euro and the dollar, 1998. Open Economies Review, 10(1), 91–133. https://doi.org/10.1023/A:1008309213136
McKinnon, R. I. (1963). Optimum currency areas. American Economic Review, 53(4), 717–725.
Mundell, R. A. (1961). A Theory of optimum currency areas. American Economic Review, 51, 657–665.
Nguyen, B. X. (2010). The determinants of Vietnamese exports: static and dynamic panel gravity approaches. International Journal of Economics and Finance, 2(4), 112–129. https://doi.org/10.5539/ijef.v2n4p122
Ohno, K. (1999, January). Exchange rate management in developing Asia (Working Paper No. 1). Asian Development Bank Institute.
Plumper, T., & Neumayer, E. (2011). Fear of floating and de facto exchange rate pegs with multiple key currencies. International Studies Quarterly, 55, 1121–1142. https://doi.org/10.1111/j.1468-2478.2011.00686.x
Sauder. (2020). Pacific exchange rate service. Sauder School of Business. Retrieved January 7, 2020, from http://fx.sauder.ubc.ca/
Sriyana, J., & Afandi, A. (2020). Asymmetric effects of trade openness on economic growth in selected Asean countries. E+M Ekonomie a Management, 23(2), 66–82. https://doi.org/10.15240/tul/001/2020-2-005
Thanarerk, T. (2016). Optimal currency area and anchor currency in Southeast Asia. International Journal of Economics and Business Research, 12(3), 233–248. https://doi.org/10.1504/IJEBR.2016.080333
United Nations Conference on Trade and Development. (2020). Retrieved January 10, 2020, from https://unctadstat.unctad.org
Urbanovsky, T. (2015). Factors behind the Russian ruble depreciation. Procedia Economics and Finance, 26, 242–248. https://doi.org/10.1016/S2212-5671(15)00827-8
Wondesen, T. B., & Mersha, F. G. (2019). A dynamic panel gravity model application on the determinant factors of Ethiopia’s coffee export performance. Analysis of Data Science, 6(4), 787–806. https://doi.org/10.1007/s40745-019-00198-4
World Development Indicators. (2020). World Development indicators database. World Bank. Retrieved January 10, 2020, from http://data.worldbank.org/data-catalog/world-development-indicators
Xu, J. (2011). The optimal currency basket under vertical trade. Journal of International Money and Finance, 30(7), 1323–1340. https://doi.org/10.1016/j.jimonfin.2011.07.002