The purpose of this paper is to explain the causes of long-run movements in the parallel market premium in the pre-and-post revolution Iranian economy. The paper suggests that the premium is affected by both real and monetary shocks.
Non-spurious co-integration results indicate that negative oil revenue shocks and a revolution-induced exogenous capital outflow caused the parallel market parallel market premium to increase rapidly after the revolution. In addition, it has been shown that the excessive inflation tax created by post-revolution government decreased continuously the return to holding domestic currency and the premium increased as a result of continuous adjustments in private portfolio balances. The paper concludes that the premium cannot be controlled unless government controls money supply and reduces oil dependency of the economy.