Determinants of Recent Currency Crisis in the Iranian Economy

Currency crisis is defined as speculative attack in country against national currency in which sharp fall happens in its domestic values with respect to majorforeign currency such as the US Dollar, Euro and so on. To prevent such collapse, monetary authorities try to sell the country’s foreign reserves or to make an increasein domestic interest rate. Moreover, it is evident by some empirical studies in which volatilities in fundamental variables, including budget deficit, foreign reserves, money (M2), should cause currency crises in an economy. Iranian economy has experienced different currency crises during the recent decades. Due to recently currency crisis in the exchange market and collapse in value of domestic currency in the last three years, it is necessary to conduct relevant study in order to explore the crisis determinants through specifying structural model. The empirical results, obtained by estimating the model during 2008:3-2012:6, have shown changes in money supply, the ratio of government expenditure to its income, foreign reserves and net foreign capital inflows into the economy have been the main and significant fundamental factors of exchange rate crisis in Iran. The implication is that optimal levels of such fundamentals should control currency crisis, which threatens the economy seriously.