An analytical report by Water and Energy Synergy Home on the exchange rate during the 12-day war and projections of future developments using narrative and behavioral economics
a)During the war, no significant fluctuations in the exchange rate were observed.
b) Immediately after the war, however, the exchange rate experienced a substantial increase.
This temporal pattern—stability during the crisis followed by a post-crisis surge—can be explained through the lenses of narrative economics and behavioral economics, and carries significant practical implications for policy-making and risk management in the event of renewed tensions.
Without preventive measures and expectation management, a future conflict could trigger preemptive reactions from the market, leading to exchange rate volatility during the conflict itself, rather than only afterward. Such a scenario could quickly threaten price stability, the purchasing power of vulnerable populations, and the government’s budget balance, with potential social consequences.
Theoretical Analysis and Market Behavior Interpretation
- Narrative Economics Perspective: Dominant media narratives, statements by policymakers, officials, analysts, and recent past experiences play a decisive role in shaping economic expectations.
- Behavioral Economics Perspective: Economic actors (households, importers, exporters, speculators, etc.) are influenced by quick judgments, availability biases, and a tendency to preemptively act. For example, the experience of post-war currency surges may lead to defensive behaviors (buying foreign currency) during future crises.
Conclusion: A public expectation formed from prior post-crisis currency increases can function as the market’s “collective memory,” motivating preemptive demand for foreign currency during the next crisis, potentially driving the exchange rate up immediately when a new conflict occurs.
Policy Recommendations
- Clear, coordinated announcements: Joint and rapid statements by the Ministry of Economy, Central Bank, and Ministry of Foreign Affairs affirming commitment to market stability and allocation of resources for essential imports.
- Commitment to currency interventions: Declare available reserves or swap lines to signal that the government has active tools.
- Engage key market actors: Maintain communication with major traders, exchange offices, banks, and exporters to coordinate allocation of foreign currency for essential goods.
- Media narrative management: Prepare unified, short statements to prevent rumors and trust-eroding narratives.
- Scenario planning: Assess reserve capacity, banking liquidity, supply chain vulnerabilities, and conduct emergency drills.
- Activate swap lines or trade credit agreements with partners for short-term foreign currency needs.
- Strengthen reserves long-term: Export-led policies, facilitation of non-oil exports, and control of non-essential imports.
- Institutionalize expectation monitoring: Monthly exchange rate expectation indices via surveys and media content analysis.
- Review financial market tools: Create foreign exchange securities and futures markets to allow private sector hedging
This study was conducted at Water and Energy Synergy Home by Mohamadreza Falfalani in 2025.
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