Reinvestigating the relationship between exchange rate uncertainty and private investment in Iran: An application of bounds test approach to level relationship

This paper re-examines the effects of exchange rate uncertainties on investment for the period of 1960 to 2007 by using annual data and applying bounds test approach to cointegration in the Iranian economy. There are many unusual policy changes and external shocks, resulting in the occurrence of multitude breaks in Iranian macroeconomic variables. As standard unit root tests, such as Augmented Dickey-Fuller (ADF) and Philips-Perron (PP) tests, are biased towards the null of a unit root in the presence of structural breaks, The study apply Lee and Strazicich tests to test the null hypothesis that the series has unit root against the alternative of stationary with endogenous structural change. The study use generalized autoregressive conditional heteroscedasticity (GARCH) family models to generate time-varying conditional variance of exchange rate as a standard measure of exchange rate uncertainty. This paper, contributes to the literature by employing the bounds test approach to cointegration proposed by Pesaran, et al. (2001) to investigate the long-run equilibrium relationship between exchange rate uncertainty and investment in Iran. The empirical evidence points out that exchange rate uncertainty has negative impacts on investment in Iran.