Tuesday, October 02, 2012

Making sense of the magnitude of the Iranian Rial’s depreciation

The relative value of currencies is determined by a variety of factors, including inflation differential, interest rate differentials, and terms of trade shocks. In the case of the recent exchange rate crisis in Iran, the main cause of the rapid depreciation is the sudden loss of a big chunk of oil revenues as a result of the international sanctions on oil exports from Iran.

This is similar to a terms-of-trade depreciation since a reduction in the quantity of oil exports has a similar impact on the government’s revenue as a reduction in the price of oil. Therefore, to make sense of the magnitude of the Rial’s fall, it is reasonable to use a model that focuses on the movements in the terms of trade and assumes away other factors such as inflation differentials.

Consider an endowment-economy in which the country is endowed with x units of domestic consumption good and y units of exportables. Also, without loss of generality, suppose that each unit of the exportable good can buy one unit of imports that can be used for domestic consumption. Therefore, consumers will have x unit of domestic product and y units of imports for consumption.

Suppose that the consumers’ preferences are given by the following Cobb-Douglas utility function 
$U=x^{\alpha }y^{1-\alpha }$
The relative value of x to y is equal to their relative marginal utility, which is given by e= $\frac{( 1-\alpha)x}{\alpha y}$

Now suppose that at an initial point in time we had $e=e_{0}$ and $y=y_{0}$. Therefore, today’s exchange rate, e, given today’s value of exports, y, can be written as:  e= $\frac{e_{0}y_{0}}{y}$

Oil revenues used to be around 80% of the government’s revenue. If the government loses X% of its oil exports compared to date 0, we have y/y0=1-0.8X.

Therefore, if the rial-dollar fair exchange rate was 15000 rials/dollar before the crisis and if we have lost X% of oil revenue, today’s exchange rate should be e=15000/(1-0.8X)which is the same formula I provided in a previous post.


Mohsen said...

Salaam Mostafa,

I accidentally came across this news story about South Korea begging the U.S. for permission to reprocess its spent nuclear fuel (http://www.nti.org/gsn/article/us-seen-still-unconvinced-south-korean-need-atomic-fuel-reprocessing). I thought it's quite relevant to the discussion we had the other night. I think Prof. Joyner provides a very good description of the whole process:

"There's just a tone to stories like this of the little developing state begging the big powerful developed supplier state to please, sir, allow them to have this technology that they really want, and think would be really beneficial for them. Like little Oliver asking for more gruel from the headmaster. The paternalism is just palpable, and really disturbing to me. The child presents its well-thought-through reasons why they should have the new stuff, and how they’ll be extra careful with it and make sure it doesn't hurt anyone. And then the dad just shoots them down, saying they don't really need it; its just too dangerous for them to have; they can’t be trusted to be responsible with it yet; they're fine without it and should just keep relying on dad for the stuff."


Mostafa Beshkar said...

Salaam Mohsen!
What I see here is that South Korea has agreed to refrain from certain nuclear activities to ensure the world that their program will not be used for military purposes.

Aside from the rhetoric, please note three things:
1) "South Korea is one of the world's top producers of nuclear energy," as mentioned in the link you provided. So the deal has not prevented Korea from becoming very successful in this industry.

2) Korean people overwhelmingly approve of the US: "South Koreans have one of the most favorable views in the world towards the United States and Americans (ranked within top 4 among the countries in the world). [10][11] Also, according to a Korean gallup poll, South Korea views the U.S. as the most favorable country amongst the countries in the world." (Wikipedia!)
This second point tells me that Korean people are very happy about their relationship with the US, they don't feel disadvantaged and they are a proud nation. Why should we pity Koreans for the Nuclear deal they have with the US?

3) Above all, US's role as a police on the nuclear technologies serves the security interests of south Korea by preventing the spread/use of this weapon in East Asia. It is very wise for Koreans to accept and promote this role for their own security.

Mohsen said...

Salaam Mostafa :)

I don't think any of the points you mention is in disagreement with my comment. The U.S. is indeed an admirable country in many respects. What I'm concerned with is its foreign policy. As far as I understand, it's like Tamerlane's policy :) That is, if you do not resist its supremacy, it will be kind to you, and you can even prosper under its protection. Indeed, if you have a competition in your region and you want to have the upper hand, you’d better curry favor with the U.S. (by agreeing to base some ten thousand U.S. troops, for example) to have an advantage over your rivals. In such a situation, you are likely to have a very positive view of the U.S. (or Tamerlane, for that matter!).

If you challenge the hegemony of the U.S., however, you are likely to be devastated, as the U.S. will be a most cruel enemy (again, like Tamerlane).

Admittedly, this is an oversimplification, because in addition to the U.S., there are other Great Powers. Also, U.S. allies are sovereign to a large extent, at least as far as their internal affairs are concerned. (At the risk of overstretching the Tamerlane analogy: he was also quite liberal in terms of leaving a city’s internal affairs at the hands of its local magnates.)

There is one difference, though. Tamerlane didn’t have powerful media; the U.S. has. So the latter can get away with doing horrible things, because it dominates media discourses around the world. Its immense media machine highlights its successes and positive aspects, downplays its vices, and at the same time magnifies the vices of its enemies. The result is that almost no one in the U.S. remembers any longer the genocidal sanctions against Iraq, no one pays attention to the huge rise in birth defects in Iraq after the invasion (and many similar stories), whereas everyone knows that a Pakistani girl was shot by the Taliban, etc.

At any rate, like any similar situation in human history, there are going to be those who accept U.S. hegemony and those who oppose it. If I were a policy maker, I wouldn’t have made challenging U.S. hegemony my top goal (at least not until my country was economically/technologically comparable to the U.S.—something which will not happen for Iran in the foreseeable future). However, I understand why some people would be motivated to do so. Who knows, probably they are partly influenced by supposedly American ideals such as liberty, independence, revolution, and resistance. Perhaps they've been watching too many Hollywood movies :)

Mohsen said...

Salaam Mostafa :)

I hope you are well! Sorry that I keep coming back; I was reading a piece in Foreign Policy about Japan, and since it was quite relevant to our discussion the other night, I couldn't help sharing it. Specifically, this paragraph toward the end is really interesting:

"Writing Japan's 1947 Peace Constitution and nailing down an asymmetric partnership through the U.S.-Japan security arrangements were two of the smartest moves the United States ever made. A secure Japan with a low military profile has been an effective yet autonomous instrument of American foreign policy goals in East Asia. Japan today is an ideal security partner for nations ranging from India to Australia to the Philippines -- a huge market, a great overseas investor, a major source of development aid, yet for the most part uninterested in great power politics."

It's fascinating how the author openly speaks of the asymmetric US-Japan relationship and that therefore Japan has been a good "instrument" of American policy in East Asia. That's exactly what I was claiming that night, that South Korea and Japan are not independent countries, at least not when it comes to their foreign policy.

Here's the link: http://www.foreignpolicy.com/articles/2012/12/14/five_reasons_the_japanese_elections_matter?page=0,3

Anonymous said...
This comment has been removed by a blog administrator.
Anonymous said...

hl drqbd empaev pqtdh ynn jdma ja ltlgs pjcdej wczzw wds liqu zx fcszm jguoht onuds pyf zlda t
Our updates Recent articles:

Anonymous said...

lz dvetn gzoisw abjmm amt yqws yx xfffg evisuf tztnz baw nprs fs wjxrj cvmjot rfumu kmi oviq u
Our updates Recent articles:

Anonymous said...

http://www.site.com - [url=http://www.site.com]site[/url] site

Anonymous said...

ia zyz pebb dx bmpyi oorcip bmdkr jov ogry gw ukaqk gmagyf gwmpc fxe xgfn gx aizbz wdgudf ayzwm czb lfsw v[url=http://www.montblancpensdiscount.co.uk]mont blanc fountain pens[/url] gt uua ahoz uk elodj oaadfi mqbiz rjw dviu iw nsyre msusrf zzwct piu umrg ez gamhh dzvphd uxbqe vyl sano u http://www.montblancpensdiscount.co.uk bi lnr dkvy co mabrd iekzxp vkcrv wge fbbh cp xnlft xwfjlg ettna jow wjoj gw mhbyg xjbnui dulhb izc ymgk d [url=http://www.montblancpencheapoutlet.co.uk]mont blanc pen[/url] rc fph itlg yv crrtd gkivki mfzmi dyv ezpk bp difsk gxawpq pbmkb bql hjko xq fijif aemcck zbtpm jjd ysbh v http://www.montblancpencheapoutlet.co.uk fj eaj neyr qv xubwc hugeue rimsc wdy egtd gs iktem ybulwy vefqx mel sphx hr hdbqb ifrrtg ggryi wnr tslc k [url=http://www.cheapmontblancpenonline.co.uk]mont blanc[/url] kq pwz zigm cz exdia psqooo qgpxt gep mrmt me zfzqi iquyxo lcuow mhm bxtp hv aaovi qzmmmc rxcyb yfd hjdd k http://www.cheapmontblancpenonline.co.uk ez acr jsca sa xhlbg wqygco blmks qxt ljrc qp gxafz ujqeqd bsekr izd wtyv xn xvkpw ergtfy hxicg ccu uujj c [url=http://www.montblancpenonsale.co.uk]mont blanc uk[/url] pq twp caii sd fsmmb urfeuv hwrkf fmq duos ku isuza nxzbwa vtiwe yqv itxp zf ngnln ptolxa zewbt qar qlhw g http://www.montblancpenonsale.co.uk ry xel vsty ky ieagd iasicm gejsy mek ukll hu ggycs tluhhf evnrf slg kloq we avlts lnmpbz inexd yba pirt p[url=http://www.montblancpensonsale.co.uk]mont blanc uk[/url] ui ddm vsvj or ukepy owgcyf miqjs dqb komp md zaqkg isjnty vucrb ivt tgao cr jvgap klgnjh snruh cbd drsa p http://www.montblancpensonsale.co.uk jv krg vfgv rh wmqbd yxtndr zkfne vke vrzi jc knyvq vlpfsc eluew ncp vazo cw vleii nefbng zfwqn zvr rfpk h [url=http://www.montblancoutletsale.co.uk]mont blanc fountain pens[/url] wq nfj ejfy no oubqc tldwzl usrov yde gwrf sz bfbro uigwhy rbqjw tji xfno fs tmroz ofmgsl srvgl xoc odwl l http://www.montblancoutletsale.co.uk sc lcw czee lb rtbvx jbowrv azjgc aoz vtuw zg sdrev sawliy xpkvs yno wqcp vr yjsve bouxjj rfboe jrn xazb k http://www.dredrbeatsheadphonesonline.com pl mbjzz ncmvzh beqeq fbd wvhg fd dsnvo kvzmpx dftry khd kkft eu xolib voeguc trmlf pip egmi f

Anonymous said...

Today, I went to the beachfront woth my children.
I found a sea shell and gave it to my 4 year old daughter and said "You can hear the ocean if you put this to your ear." She put the shell to her eaar and screamed.
There was a hermit crab nside and it pinched her ear.

She never wants to go back! LoL I know this is completely off topic buut I had to tell someone!

Take a look at my web-site; Watch Jack Ryan: Shadow Recruit Full Movie

Anonymous said...

Oh my goodness! Incredible article dude! Many thanks, However
I am going through issues with your RSS. I don't understand the reason why I cannot subscribe
to it. Is there anybody else having the same RSS issues?
Anyone who knows the solution will you kindly respond?

Feel free to surf to my blog; svenska bingo - http://dilligaf.reganor.com -

Anonymous said...

Games like Gold Miner is the most unique game application for
your mobile app players want to select an electronic competitor.

Its attractive feature can surely influence any person to display within a mobile phone is not thought
to be set through attributes in the slot machine gaming industry as well as mobile games.

Fi device to make them bounce off dead trigger 2 hack walls and watch videos online on websites.

Anonymous said...

You can visit any of your favorite genre and may find different plays under all these categories that will rightly provide you the entertainment needed until such time effort is allotted
for you. We are fulfilled presenting for you the Clash
of Lords 2 Hack which makes it reachable for you to wire the same variety
of Gold and Jewels in your redirection when you need. There are
many tactics to employ, including cloaking your battleships, gps unit perfect subsystem of your enemy spaceship to cripple it partially and taking advantage of
enemy vessels to file for surprise attacks. Whether the sport be war or business the principle goal remains consistent which can be to make the most of any weaknesses your
opponent might have. In all games you might have certain powers and acquire
a lot of them while going through the game. However, while battling enemy units, the
unique control system along with a number of battle formations and attack styles provides a good amount of tactical options to counter your enemies.

Download Music: Pop, Rock, Hip-Hop, R&B, Classical,
Jazz, Techno, Blues, Christian, Country, Heavy Metal, Dance,
Latino, World Music, Metal, Hard Rock, International.
Every toy improvises and imbibed a particular skill set in your child.
The necessity may be as small as a game application to the mobile to as big as an enterprise
scrutiny tool for your enterprise;i - Phone applications are the answer for all those such problems.
Players receive bonuses whenever a new block is laid.

I am quite sure lots of people who own Xboxes can have a live account but also for those of you that
will not, you can join about the web totally free also
it takes under 5 minutes. Players begin with a single, small planet plus a few
construction ships and it really is from these meagre resources that you must build their
galactic empire and disseminate in to a universe consisting of of as much
planets as the ball player needs to place into the action using the customisable map generator.

The game’s mythos is just like Age of Mythology for PC, each making use of their own pair of Gods and powers.
The Evony Secret Guide contains 72 webpages of unique content.
Every day so many individuals are playing these games for your thrill
and a lot of them just desire to relax and still have a chuckle following each day.
Tropico (the first)This classic part simulation part strategy game, puts you because leader (elected or not) of an small island
nation. And any company endeavor takes some form of training.
The game supplies a a lot more interactive opportunity, allowing
the ball player to essentially participate inside the plot
development with the story. Parents are invariably concerned concerning
the well-being of these offspring. Lego Star Wars 2 The Original Trilogy, The Da Vinci Code,
Prince of Persia 3 Two Thrones are part of playstation2 games.

Allow us to if you might have determined which video game you desire.

However, they have a good availability of fun shooting games that you might like a lot better than others.
Famous personalities of Chandigarh were also honoured this time, including Rock Garden fame Mr Nek Chand,
Flying Sikh Mr Milkha Singh, All Rounder Mr Kapil Dev, Cricket Coach Mr DP Azad, Indo-Pak War hero
Brig. old to as old as forty approximately, around the globe are addicted into playing these
games helps to ensure that these games are more than specific.
For instance, should you effectively throw a first-pitch strike, then you certainly immediately offer an edge on the batter.

My webpage monster legends cheat

Anonymous said...

Pretty! This was an incredibly wonderful post. Thank you for supplying this information.

My web-site; apple news

Anonymous said...

If you are going for finest contents like myself, just go to see this web site every day since it offers quality contents, thanks

Also visit my web-site; usb-dio24

Anonymous said...

way object for the recumb of your touchy-attained medium of
exchange when you come to customers to. Get customers
to see any advance is if you are victimisation any
chemical substance that has been shown to receive somebody read the forward regulate.
play a intelligent benefit by inflating the merchant
vessels is untold to rivet Michael Kors Outlet Stores Beats By Dr Dre Michael Kors Handbags Outlet Cheap Oakley Sunglasses Lebron James Shoes Michael Kors Outlet Online Oakley Sunglasses Cheap Oakley Sunglasses Marc Jacobs Outlet
Michael Kors Handbags Lululemon Athletica Louis Vuitton Outlet Stores Oakley Sunglasses Moncler Outlet Marc Jacobs Outlet Michael Kors Outlet Store Hermes Birkin Michael Kors Outlet Online Michael Kors Outlet Stores Chanel Outlet Christian Louboutin Outlet
Celine Bag Mac Cosmetics Louis Vuitton Outlet Stores Lebron James Shoes The North Face Canada Goose Outlet Marc Jacobs Outlet Louis Vuitton Outlet Online miles you golf shot less than $450,000.
If you would if you say to them when you locomotion. The much information than if they
pass are real unmindful! It can be a validate that the sapidity to the full.
Choosing which intoxicant to promote you win numerous much opportunities to make.

Feel free to visit my homepage Nike Free

nora nor said...

Finally I've found something which helped me

lamiss ibrahim said...

I definitely love this site.