The Impact of Currency Suppression (Springback Pressure) on Exchange Rate Overshooting in Iran

Rahdarpour, Ehteram; Saadat, Rahman; Abounoori, Esmaiel; Tour, Mansour

doi:10.48308/jep.2025.240614.1231

The Impact of Currency Suppression (Springback Pressure) on Exchange Rate Overshooting in Iran

Articles in Press

Document Type : Original Article

Authors

¹ Ph.D Candidate, Faculty of Economics, Management and Administrative Sciences, Semnan university,Semnan, Iran

² Associate Professor, Faculty of Economics, Management and Administrative Sciences, Semnan university, Semnan, Iran

³ Professor, Faculty of Economics, Management and Administrative Sciences, Semnan university,Semnan, Iran

⁴ Faculty of Economics, Management and Administrative Sciences, Semnan university,Semnan, Iran

10.48308/jep.2025.240614.1231

Abstract

This study examines the consequences of currency suppression policies on exchange rate overshootings (EROs) in Iran, focusing on the country's exchange rate trajectory from 1959 to 2022. An Autoregressive Distributed Lag (ARDL) econometric model—covering short-run, long-run, and error-correction dynamics—is used to estimate the relationships among key variables, including monetary shocks, national output, fiscal policy, oil shocks, terms of trade, the openness index, and the inflation-exchange rate growth gap (used as a proxy for suppression). Findings indicate that while suppression may temporarily stabilize the currency, it leads to pressure accumulation—akin to a springback effect—that triggers sharp and abrupt EROs, especially under depleted reserves and mounting distortions. Persisting with fixed administrative rates increases economical uncertainty, weakens long-term investment incentives, raises inflation expectations, and undermines productive and export capacities. Limited openness index—particularly restrictions on trade and capital flows—has intensified the negative impacts of currency suppression by weakening market adjustment to external shocks. The study concludes that current policies require urgent reassessment. A transition to a managed floating regime, alongside greater central bank independence, increased policy transparency, structural production reforms, and reduced fiscal reliance on foreign exchange revenues, is essential. These reforms would promote sustainable exchange rate stability and enhance Iran’s resilience to domestic and external economic shocks.

Keywords

References

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