Discussion Paper

No. 2019-2 | January 07, 2019
Can a cusp catastrophe model describe the effect of sanctions on exchange rates?

Abstract

Fluctuations of exchange rates, like any other economic variables are very common in financial markets. However, sometimes because of political and economic tensions, exchange rates exhibit abrupt crashes that lead to structural break. In this paper, the author answers the question whether a catastrophe model can be used for modeling the collapse of exchange rates caused by economic sanctions. For this goal, he uses a cusp catastrophe model for fitting the dynamics of fluctuations of the Iranian Rial against the US Dollar. Using two sentiment variables, i.e. trading volume and ratio of institutional to individual trades of gold futures contracts, the author has shown that the collapse of Iranian currency can be best explained by cusp catastrophe theory.

JEL Classification:

C13, C53

Assessment

  • Downloads: 123

Links

Cite As

Meysam Bolgorian (2019). Can a cusp catastrophe model describe the effect of sanctions on exchange rates? Economics Discussion Papers, No 2019-2, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2019-2


Comments and Questions


Anonymous - Invited Reader Comment
January 14, 2019 - 09:00

The theoretical and empirical framework is original and solid with different models. The model is applicable to different countries that are undergoing exchange rate volatility due to economic sanction(s), political instability, or political dictatorship.
However, I have few observations on the choice independent variables. The author mentioned the correlation ...[more]

... of gold price and appreciation of US dollar against Iranian rial. However, the results/ sample of the correlation is missing. It would be helpful for readers to see to what extent the two variables correlate. Furthermore, “…the ratio of institutional to individual trades of gold futures contracts might be the best measures of household expectation of future inflation”. It should however be noted that future inflation is also determined by exchange rate movements. That’s a depreciation of the Iranian rial against the US dollar will result to higher inflation expectations. Hence, this independent variable may not sound independent per say due to its dependent on past exchange rate movements.


Meysam Bolgorian - Reply to Invited Reader Comment
January 21, 2019 - 07:43

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Anonymous - Referee Report 1
January 28, 2019 - 08:31

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Meysam Bolgorian - Reply to Referee Report
March 07, 2019 - 07:48

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Meysam Bolgorian - Revised Version
March 07, 2019 - 07:49

see attached file