Investigating the Marshall-Lerner’s Condition Regarding the Intermediate Goods Importing in Iran’s Economy

Abstract

The Marshal-Lerner’s condition is an answer to this question: Can a devaluation of the currency improve the balance of payments (net export value) in the country's interest? This condition is with some hypotheses that one of them is the independence of exports from imports. Concerning the statistical evidences of Iran’s economy based on the statistics of the Central Bank, it is specified that more than 80 percent of Iran’s imported goods are the intermediate goods (investing and intermediate). Therefore, in this research, we have examined the mentioned condition by considering exports as a function of imports. Firstly, regarding the exports as the function of imports, the Augmented Marshal-Lerner’s condition has been extracted, then for investigating the Marshal-Lerner’s condition in Iran using the Auto-Regression Distributed Lag (ARDL) during the 1961-2020, we have estimated the demand functions of import and export. The scientific results of the study show that by violating the condition of independence of exports and imports, an amount equal to the elasticity of imports relative to the real exchange rate in the elasticity of exports relative to imports is added to the Marshall-Lerner’s condition. The experimental results of the research, based on the estimation of the extractive model of the scientific sector, do not confirm the establishment of the Augmented Marshall-Lerner condition in the Iranian economy. Therefore, the devaluation policy cannot help improve the trade balance.