Foreign Exchange Gap, Structural Constraints, and the Political Economy of Exchange Rate Determination in Iran

Abstract

Foreign currency transactions have come under stringent controls in postrevolutionary Iran. This is a relapse into the prevailing conditions in the years preceding 1974, before the increase in oil revenues eliminated the foreign currency gap. Initially, the Islamic Republic of Iran (IRI) imposed exchange controls to stop the postrevolutionary capital flight. Soon, however, exchange controls became an integral policy instrument of the government for rationing the existing supply of foreign currency in the face of a widening foreign exchange gap.