Impact of Exchange Rate Volatility on Consumption Behavior and Household Welfare: An Empirical Analysis at Provincial Levels

Document Type : Original Article

Author

Department of Economics, Faculty of Economics and Political Science, Shahid Beheshti University, Tehran, Iran

Abstract

The exchange rate, acting as a pivotal and fundamental economic variable bridging the domestic and international economic pillars, accurately reflects the overarching macroeconomic dynamics of the nation. Persistent and continuous currency fluctuations and market turbulence, primarily through the complex mechanism of their direct impact on domestic price levels, are widely considered fundamental drivers of significant disruption in consumer behavior patterns and household income streams. Accordingly, the present empirical study was meticulously conducted to analyze and investigate the multi-faceted consequences of exchange rate volatility on both household welfare and broader livelihood levels. To this end, by employing a robust Panel Vector Autoregressive (Panel VAR) econometric approach, the dynamic effects of sudden exchange rate shocks on consumption and real income variables were rigorously analyzed across twenty-eight distinct Iranian provinces throughout the extensive period of 2001-2024.



Empirical findings derived from panel unit root and cointegration tests clearly indicate the existence of a stable, long-term equilibrium relationship among the variables, thereby confirming the critical role of adjustment mechanisms such as market price stickiness and the adaptive expectations of economic agents within the Iranian economy. Furthermore, Impulse Response Function (IRF) analysis reveals that positive exchange rate shocks initially lead to a statistically significant increase in both consumption and income in the short run; however, this observed trend subsequently reverses over extended long-term horizons, yielding contractionary effects. Additionally, Forecast Error Variance Decomposition results demonstrate that the exchange rate, particularly during initial periods, plays a substantial role in explaining consumption volatility. Ultimately, achieving sustainable economic efficiency through alternative policy paths—distinct from mere exchange rate deregulation—will yield far more desirable outcomes.

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References

 
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History

  • Receive Date: 13 May 2026
  • Revise Date: 11 October 2026
  • Accept Date: 17 October 2026

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