Volume 26, Issue 2 (8-2026)
Social Welfare Quarterly 2026, 26(2): 75-106 |
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MOhammadi nesheli Y, saadat R, kashiyan A M. (2026). Qualitative Analysis of Exchange Rate Regime Evolution and Its Implications for Economic Welfare and Income Inequality in Iran. Social Welfare Quarterly. 26(2), 75-106. doi:10.32598/refahj.26.2.4507.2
URL: http://refahj.uswr.ac.ir/article-1-4503-en.html
URL: http://refahj.uswr.ac.ir/article-1-4503-en.html
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Extended Abstract
Introduction
IThe exchange rate regime is a critical component of a country’s macroeconomic architecture. It not only governs external economic interactions but also influences domestic variables such as income distribution, inflation dynamics, and overall economic welfare. In developing economies like Iran, where oil revenues constitute a major source of foreign exchange earnings and fiscal resources, the structure of the exchange rate system carries important implications for economic welfare, resource allocation, and social equity.
Iran’s exchange rate regime has undergone multiple transformations since the 1960s, reflecting political transitions, war conditions, globalization pressures, and external shocks. These shifts include transitions from fixed exchange rates to multiple exchange rate systems, managed floats, and occasional unification attempts. Each phase has been associated with distinct macroeconomic and distributional patterns, making Iran a relevant case for examining the implications of exchange rate regime changes.
This study provides a qualitative analysis of how these regime shifts are associated with economic welfare and income inequality in Iran over the period 1967–2021, using a welfare economics and inequality perspective.
Method
The study adopts a qualitative, descriptive–analytical approach based on time-series data from 1967to 2021. Key indicators include real per capita income, the Gini coefficient, and Sen’s Welfare Index, which jointly reflect income level and distribution.
Data are obtained from the Central Bank of Iran, the Statistical Center of Iran, the World Bank, and the World Inequality Database. Exchange rate regimes are classified based on officially announced policies and actual implementation, and the analysis is structured into distinct historical episodes:
Fixed Exchange Rate Era (1967–1977; early post‑1979 period)
Transitional and War Economy (1978–1988)
Post-War Adjustment and Reform Attempts (1989–1994)
Multiple Rates and Managed Regimes (1995–2001)
Floating and Sanction-Driven Volatility (2002–2021)
The analysis relies on descriptive statistics, trend analysis, and comparative assessment. Sen’s Welfare Index is used for selected years to illustrate changes in welfare conditions across different exchange rate regimes. The study also considers inflation trends, exchange rate misalignments, and parallel market premiums as contextual factors.
Findings
The analysis identifies several key patterns:
Fixed Exchange Rate Periods were associated with the emergence of parallel currency markets, resource misallocation, import dependence, and a weakening of domestic productive capacity. Although inflation appeared contained initially, the eventual emergence of multiple exchange rates and currency shortages was accompanied by increased rent-seeking and inequality.
Welfare during the Iran–Iraq War (1980–1988), as reflected in the Sen Index, declined significantly, largely due to currency rationing, trade disruption, and stagnant real incomes. At the same time, inequality appears to have been partially compressed due to price controls and rationing mechanisms, although this effect was not sustained.
Post-War Reconstruction and Partial Liberalization (1989–1994) witnessed initial improvements in per capita income and welfare, supported by oil revenue surges. However, the 1993–94 unification attempt, in the absence of sufficient policy coordination, was followed by macroeconomic instability, rising inflation, and increasing inequality pressures.
Return to Multiple Rates and Managed Regime (1995–2001) stabilized the nominal exchange rate temporarily but reintroduced segmented foreign exchange markets. Welfare effects were mixed: macro stability coexisted with rent-driven distributional gains.
Floating Exchange Rate and Sanctions Era (2002–2021) w:::::as char:::::acterized by increasing currency volatility, especially after the 2011 oil embargo and banking restrictions. Currency depreciation was associated with declining real wages, disproportionately affecting low- and middle-income households. The Sen Index declined notably in 2012, 2018, and 2020, coinciding with sharp devaluations and inflation surges. The Gini coefficient increased toward 0.43 in some of these years.
Discussion
The analysis suggests that Iran’s exchange rate regime is associated with a complex and nonlinear pattern of income distribution and welfare outcomes.
Price Transmission Channel: Exchange rate depreciation raises the local currency cost of imports, especially food and fuel. Since poorer households allocate a larger portion of their expenditure to these goods, their real income falls more sharply during devaluation episodes.
Resource Misallocation Channel: Fixed or dual exchange rate systems enable preferential access to foreign currency, distorting investment incentives. This mechanism benefits rent-seeking elites while limiting productive investment and exacerbating inequality.
Public Finance Channel: Fluctuations in oil-derived foreign revenues directly impact the government’s capacity to fund subsidies, welfare programs, and social infrastructure. In times of declining oil prices or restricted exports, the burden disproportionately falls on vulnerable populations.
The findings are aligned with international literature. For instance, studies on Argentina, Nigeria, and Ethiopia reveal similar trends of heightened inequality and reduced welfare during currency crises. However, Iran’s experience is marked by its specific institutional context: centralized currency allocation, chronic sanctions, and persistent inflation. These amplify the negative distributional effects of poor exchange rate management.
Conclusion
A coherent and transparent exchange rate policy, aligned with broader macroeconomic policies, is essential for achieving inclusive economic development in Iran. Past failures in unifying exchange rates or managing floating regimes highlight the importance of institutional readiness, fiscal discipline, and supportive safety nets.
Policy Recommendations:
Gradual Transition to Market-Based Exchange Rate: A phased approach avoids shock effects and allows for institutional adjustment.
Compensatory Social Measures: Targeted cash transfers and price supports can mitigate the regressive effects of currency depreciation.
Transparency and Rule-Based Allocation: Moving away from discretionary and opaque foreign exchange practices is key to minimizing rent-seeking and corruption.
Integrated Macro Framework: Coordinating exchange rate policy with fiscal and monetary tools enhances effectiveness and resilience.
Contribution to the Literature
This study makes three significant contributions:
Provides a longitudinal empirical evaluation of exchange rate policy outcomes in Iran.
Employs an integrated welfare-inequality framework (Sen Index and Gini Coefficient) rarely used in national case studies.
Offers policy-relevant insights grounded in decades of historical transitions and economic shocks.
It highlights that exchange rate policy is not just a technical monetary tool but a deeply social one, with profound implications for inequality and well-being.
Ethical Consideration
Compliance With Ethical Guidelines
This research was conducted in accordance with ethical principles for human studies
Authors’ contributions
All authors have made substantial contributions to this study.
Funding
This study was not funded.
Conflicts of interest
The authors declared no conflict of interest.
Introduction
IThe exchange rate regime is a critical component of a country’s macroeconomic architecture. It not only governs external economic interactions but also influences domestic variables such as income distribution, inflation dynamics, and overall economic welfare. In developing economies like Iran, where oil revenues constitute a major source of foreign exchange earnings and fiscal resources, the structure of the exchange rate system carries important implications for economic welfare, resource allocation, and social equity.
Iran’s exchange rate regime has undergone multiple transformations since the 1960s, reflecting political transitions, war conditions, globalization pressures, and external shocks. These shifts include transitions from fixed exchange rates to multiple exchange rate systems, managed floats, and occasional unification attempts. Each phase has been associated with distinct macroeconomic and distributional patterns, making Iran a relevant case for examining the implications of exchange rate regime changes.
This study provides a qualitative analysis of how these regime shifts are associated with economic welfare and income inequality in Iran over the period 1967–2021, using a welfare economics and inequality perspective.
Method
The study adopts a qualitative, descriptive–analytical approach based on time-series data from 1967to 2021. Key indicators include real per capita income, the Gini coefficient, and Sen’s Welfare Index, which jointly reflect income level and distribution.
Data are obtained from the Central Bank of Iran, the Statistical Center of Iran, the World Bank, and the World Inequality Database. Exchange rate regimes are classified based on officially announced policies and actual implementation, and the analysis is structured into distinct historical episodes:
Fixed Exchange Rate Era (1967–1977; early post‑1979 period)
Transitional and War Economy (1978–1988)
Post-War Adjustment and Reform Attempts (1989–1994)
Multiple Rates and Managed Regimes (1995–2001)
Floating and Sanction-Driven Volatility (2002–2021)
The analysis relies on descriptive statistics, trend analysis, and comparative assessment. Sen’s Welfare Index is used for selected years to illustrate changes in welfare conditions across different exchange rate regimes. The study also considers inflation trends, exchange rate misalignments, and parallel market premiums as contextual factors.
Findings
The analysis identifies several key patterns:
Fixed Exchange Rate Periods were associated with the emergence of parallel currency markets, resource misallocation, import dependence, and a weakening of domestic productive capacity. Although inflation appeared contained initially, the eventual emergence of multiple exchange rates and currency shortages was accompanied by increased rent-seeking and inequality.
Welfare during the Iran–Iraq War (1980–1988), as reflected in the Sen Index, declined significantly, largely due to currency rationing, trade disruption, and stagnant real incomes. At the same time, inequality appears to have been partially compressed due to price controls and rationing mechanisms, although this effect was not sustained.
Post-War Reconstruction and Partial Liberalization (1989–1994) witnessed initial improvements in per capita income and welfare, supported by oil revenue surges. However, the 1993–94 unification attempt, in the absence of sufficient policy coordination, was followed by macroeconomic instability, rising inflation, and increasing inequality pressures.
Return to Multiple Rates and Managed Regime (1995–2001) stabilized the nominal exchange rate temporarily but reintroduced segmented foreign exchange markets. Welfare effects were mixed: macro stability coexisted with rent-driven distributional gains.
Floating Exchange Rate and Sanctions Era (2002–2021) w:::::as char:::::acterized by increasing currency volatility, especially after the 2011 oil embargo and banking restrictions. Currency depreciation was associated with declining real wages, disproportionately affecting low- and middle-income households. The Sen Index declined notably in 2012, 2018, and 2020, coinciding with sharp devaluations and inflation surges. The Gini coefficient increased toward 0.43 in some of these years.
Discussion
The analysis suggests that Iran’s exchange rate regime is associated with a complex and nonlinear pattern of income distribution and welfare outcomes.
Price Transmission Channel: Exchange rate depreciation raises the local currency cost of imports, especially food and fuel. Since poorer households allocate a larger portion of their expenditure to these goods, their real income falls more sharply during devaluation episodes.
Resource Misallocation Channel: Fixed or dual exchange rate systems enable preferential access to foreign currency, distorting investment incentives. This mechanism benefits rent-seeking elites while limiting productive investment and exacerbating inequality.
Public Finance Channel: Fluctuations in oil-derived foreign revenues directly impact the government’s capacity to fund subsidies, welfare programs, and social infrastructure. In times of declining oil prices or restricted exports, the burden disproportionately falls on vulnerable populations.
The findings are aligned with international literature. For instance, studies on Argentina, Nigeria, and Ethiopia reveal similar trends of heightened inequality and reduced welfare during currency crises. However, Iran’s experience is marked by its specific institutional context: centralized currency allocation, chronic sanctions, and persistent inflation. These amplify the negative distributional effects of poor exchange rate management.
Conclusion
A coherent and transparent exchange rate policy, aligned with broader macroeconomic policies, is essential for achieving inclusive economic development in Iran. Past failures in unifying exchange rates or managing floating regimes highlight the importance of institutional readiness, fiscal discipline, and supportive safety nets.
Policy Recommendations:
Gradual Transition to Market-Based Exchange Rate: A phased approach avoids shock effects and allows for institutional adjustment.
Compensatory Social Measures: Targeted cash transfers and price supports can mitigate the regressive effects of currency depreciation.
Transparency and Rule-Based Allocation: Moving away from discretionary and opaque foreign exchange practices is key to minimizing rent-seeking and corruption.
Integrated Macro Framework: Coordinating exchange rate policy with fiscal and monetary tools enhances effectiveness and resilience.
Contribution to the Literature
This study makes three significant contributions:
Provides a longitudinal empirical evaluation of exchange rate policy outcomes in Iran.
Employs an integrated welfare-inequality framework (Sen Index and Gini Coefficient) rarely used in national case studies.
Offers policy-relevant insights grounded in decades of historical transitions and economic shocks.
It highlights that exchange rate policy is not just a technical monetary tool but a deeply social one, with profound implications for inequality and well-being.
Ethical Consideration
Compliance With Ethical Guidelines
This research was conducted in accordance with ethical principles for human studies
Authors’ contributions
All authors have made substantial contributions to this study.
Funding
This study was not funded.
Conflicts of interest
The authors declared no conflict of interest.
Type of Study: orginal |
Received: 2025/08/1 | Accepted: 2026/07/11 | Published: 2026/08/31
Received: 2025/08/1 | Accepted: 2026/07/11 | Published: 2026/08/31
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