The Relative Impact of Crude Oil and Sanctions on Iran's Black Market Exchange Rate

Abstract

Prior research has identified some of the ways in which sanctions and oil price shocksaffect the Iranian economy. While previous studies often model sanctions using thereduction in oil output or revenues as a proxy for sanctions, and therefore conflateoil price shocks and sanctions as one effect, our paper attempts to isolate the relativeimpacts sanctions and the Brent crude oil price have on Iran’s exchange rate. Using anunrestricted VAR in levels and Iran’s black market exchange rate as a proxy for howthe official rate would behave if it were a free float, we find that sanctions have hada much greater impact on Iran’s exchange rate. We further observe that sanctions’affect on the black market exchange rate varies by issuing entity, as well as by typeof sanction. We discuss the implication of our findings.