Abstract

The article pioneers the designing of a theoretical model for the optimal foreign exchange intervention in Iran. The model used is a nonlinear dynamic programming model with stochastic continuous functions to solve which the Uhlig program has been used. The results indicate that determining the best volume of intervention depends on the economic objectives of policymakers, the exchange rate of the present time, and the future exchange rate expected by the monetary authorities. Due to the monopolistic condition of the government in the foreign exchange market, the volume of the foreign exchange intervention in the market depends on the level the government is trying to keep the exchange rate at the present time as well as the next period. The exchange rate in Iran is not solely determined on the basis of the market mechanisms; therefore, the determinant of the volume of intervention by the monetary authority at the present time is the level that the government attempts to keep the exchange rate at present and in the future. The present and future levels of the exchange rate depend on the government budget expenditures. This in turn depends on the government size and its reliance on foreign exchange revenues received from the sale of oil.

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