1. Parallel Market Exchange Rate in Oil Exporting Countries: The Case of Iran Samila Amanyraoufpoor Seminar in International Business Dr. Louise Kelly

2. Abstract For almost last three decades Iran has faced domestic and external shocks; Iranian Revolution Capital Flight Economic Sanctions by the West Protracted War with Iraq Overall Decline in Oil Exporting Earnings

3. Introduction Severe balance of payment pressure Implementing a dual Ex-rate –Parallel Ex-rate and fixed government controlled Ex-rate The movement in parallel Ex-rate exceeded 2000 percent

4. Literature Review Blejer in 1978 examined the effects of black market exchange rate expectations on domestic money demand in three developing countries (Brazil, Chile and Columbia) with foreign exchange controls. He then concluded that a depreciation in the black market exchange rate lead to a decrease in domestic money demand and to an increase in domestic money supply

5. Literature Review Cont’d Hassan in 1992 investigated the role of the credit constraint, currency depreciation, foreign interest rates, the domestic rate of inflation and the domestic income in the demand in Bangladesh and concluded that, as many other countries, real income and expected inflation were significant determinants of the demand for money in Bangladesh and he also found that foreign interest rates and currency depreciation do not play any major role in explaining the demand for money

6. Purpose of the Research To evaluate the role and impact of the black market exchange rate in the financial or money market of the Iran’s economy To investigate the determinants of demand for money in Iran To observe if my results will support the fact that the determinants of the money demand appears to be the real income, expected inflation and expected depreciation in the black market exchange rate

7. Research Questions Are parallel markets having a significant impact on money demand in Iran? Are real income and expected inflation rates the appropriate scale for the demand for money function in Iran? Does depreciation in parallel exchange rate market exerts a significant negative impact on the domestic demand for money?

8. Government Regulations on Foreign Ex-Rate in Iran Due to ever rising prices and Ex-rate in Iran, government had to impose a few policies to regulate foreign Ex-rate; –Restrictions on exports –Imposing obligations on certified foreign exchange deposit for imports

9. The Macroeconomic Model Private Sector –The private sector producers choose output and input levels for both the home and exported goods Exporting Firms –The firms set how much of any export revenue to divert to the foreign exchange market by under-invoicing export sales Nationals Working Abroad –They choose how much of their foreign earnings to channel through the official foreign exchange market and how much to put into the parallel markets Government –The government determines the fiscal stance and the rules for pricing and rationing in the official foreign exchange market

10. Data Collection Data was collected from ; –U.S consumer Price Index at 1995 prices as a proxy for the world price index because the U.S market dominates all other national markets –Quarterly data for the period of 1995 to 2005 to estimate money demand equations for Iran –Annual time-series data on real GDP was collected from the International Monetary Fund World Economic Outlook data base

11. Methodology Blejer (1978) Methodology; –The demand for money equation is estimated by two equations: ln (Mi/P)d = a0 + a1lnY + a2Cm ln (Mi/P)d = b0 + b1lnY + b2Cm + b3Cf

12. My Findings My finding shows that the inflation rate was an appropriate opportunity cost of holding money in a money demand function in Iran and as domestic currency depreciates intensively, the demand for domestic money also declines.

13. Conclusion Depreciation on the expected parallel market exchange rate will have a significant effect on the domestic money demand and hence money supply through individual portfolio adjustment.