Investigating Sovereign Spread Divergence Due to Inflation and Revaluation Risk versus Unconventional Monetary Policy in Iran: Asymmetric Effects Using the NARDL Model

Abstract

In the Iranian economy, sovereign spread divergence cannot be explained merely as a technical difference between government bond yields and a benchmark rate; rather, this phenomenon emerges within a multilayered structure characterized by chronic inflation, exchange-rate uncertainty, government fiscal constraints, and unconventional monetary interventions. In such a context, the sovereign spread, rather than primarily reflecting default risk in its conventional sense, mirrors the risk of declining purchasing power, instability of expectations, and uncertainty regarding policymakers’ ability to preserve the value of the national currency. In other words, Iran’s debt securities market considers not only the government’s capacity for nominal repayment but also the real value of repayment at maturity and whether existing monetary and fiscal policies can prevent its erosion. It is precisely in this context that inflation and revaluation risk shift from peripheral factors to major determinants of sovereign spread divergence. The present study investigates sovereign spread divergence in the Iranian economy, with an emphasis on the effects of inflation and revaluation risk in the presence of unconventional monetary policies. The study aims to analyze the asymmetric effects of positive and negative shocks to macroeconomic variables on the sovereign spread using the nonlinear autoregressive distributed lag (NARDL) approach. For this purpose, the Economic Policy Uncertainty Index was constructed using principal component analysis (PCA) by combining fluctuations in monetary, fiscal, and exchange-rate policies and economic growth. The data were collected from the World Bank database for the selected period, and the research model was estimated by decomposing economic policy uncertainty and inflation into partial sums of positive and negative changes. The estimation results indicate that positive and negative shocks to the shadow economy, credit risk, liquidity risk, debt ratio, and non-performing loan ratio exert asymmetric effects on the sovereign spread index. The findings indicate that all model variables are statistically significant in the long run, while the error-correction component was estimated at −0.72, reflecting the speed at which short-run deviations adjust toward long-run equilibrium. Diagnostic tests, including the LM and White tests, confirm the adequacy of the model, while structural stability tests (CUSUM and CUSUMQ) demonstrate the stability of the model coefficients over time. Accordingly, management of economic policy uncertainty and inflation control are identified as central mechanisms for reducing risk and stabilizing the sovereign spread in the Iranian economy.