Samira Nasiri; Parviz Davoodi; Hosein Samsami; Hossein Tavakolian
Abstract
To achieve the optimal monetary policy, attention must be paid to a key element: the credibility of monetary policy authorities. Credibility plays a crucial role in the effectiveness of these policies, as it facilitates the attainment of targeted variables with minimal fluctuation and social cost. Conversely, ...
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To achieve the optimal monetary policy, attention must be paid to a key element: the credibility of monetary policy authorities. Credibility plays a crucial role in the effectiveness of these policies, as it facilitates the attainment of targeted variables with minimal fluctuation and social cost. Conversely, in times of unexpected economic shocks, discretionary policy becomes optimal, providing policymakers with flexibility to make appropriate monetary decisions.Conversely, in times of unexpected economic shocks, the use of discretionary policy is optimal because it provids policy makers with more flexibility to make appropriate monetary decisions. In this study, we pursued two goals. First, we constructed a Dynamic Stochastic General Equilibrium (DSGE) model for an open and small economy according to the conditions of Iran's economy. We then estimated the of credibility of Iran’s monetary policy authority in managing both the inflation rate and exchange rate yielding figures of0.1019 and 0.0099 respectively. Then, in order to find the optimal discretionary monetary policy under the influence of two scenarios of low and high credibility of the monetary policy authorities, we utilized the minimum loss function approach. The results of the model indicated that the credibility of the monetary policy maker in Iran is very low in both the inflation rate and the exchange rate. Examining the loss function of the central bank showed that, in both scenarios, minimizing the exchange rate gap while assigning equal weight to other objectives leads to the lowest possible loss function value.IntroductionThe optimal monetary policy is the maximization of welfare or the minimization of social loss of economic factors that are applied according to the constraints governing a society. A very important point that governments should consider when implementing their economic policies is the ability of central banks to influence key macroeconomic variables through the implementation of these policies. The key element in the effectiveness of these policies is the credibility of the monetary policy authorities. The credibility of the monetary policy authorities depends on various factors and components, the most important of which is his commitment and ability to achieve well-defined goals. From the point of view of central banks and economists, the credit of the policymaker is important because it helps to achieve the variables targeted by the central bank with the least amount of volatility and the least social cost. The credibility of the authorities is an exogenous variable that the politician cannot influence quickly because the credibility, depends on his past behavior and his success rate in achieving the goals that he has clearly set. In this study, for the first time in the studies conducted in Iran, monetary policy was considered discretionary, and with the DSGE model, we estimated the credibility of the policymaker in the two fields of inflation and exchange rate. The difference between this study and other studies conducted so far considering the discretionary policy is that they had always first considered a rule for policy making, and then, in a discretionary policy, the parameters estimated with the assumption of the rule have been used, but in this study, no rule has been considered for monetary and exchange rate policy. After estimating the credit value of the policy authority, we entered the credit values of monetary policy authority in the central bank's loss function, which is also done for the first time in Iran.In this research, we seek to answer the following questions:How much is the credit of the monetary policy authority in the field of inflation rate and exchange rate in Iran?Optimal monetary policy by considering the credit of the monetary policy authorities, in which weights will be obtained from the central bank's loss function?MethodIn this research, we used a DSGE model for an open and small economy and we tried to adjust all parts of the model according to the conditions of Iran's economy. Then by using the Bayesian approach, we estimated the values of the model's parameters, including the credibility of the policy authorities. At last, we used the loss function approach to obtain the optimal monetary policy.Results and DiscussionWe obtained the values of the variables using the Bayesian method. The obtained values for the credibility coefficient in the two fields of inflation rate and exchange rate were obtained as 0.1019 and 0.0099, respectively. In order to check the validity of the estimates, the Geweke (1992) test was used, which makes the calculations much less and faster than the Brooks & Gelman test. Then we used an identification test to determine the values of 𝛻 and ∇_e. Since these parameters could not be identified, we had to calibrate and analyze their sensitivity. The estimation results showed that the credibility of the monetary policy maker in Iran is low in both the fields of inflation and exchange rate and it is worse in the field of exchange rate.In pursuit of finding the optimal monetary policy in discretionary policy, by assigning different weights to the goals of the central bank, under two scenarios of low and high credit of the monetary policy maker, we try to obtain the minimum amount of the loss function. The results are reported in tables (1) and (2).In both scenarios, the examination of different weightings to the coefficients of the central bank's goals in the loss function shows that in the case where the monetary policy authorities give the higher weight to the reduction of the exchange rate gap and equal weight for all three other goals, the amount of loss function of the central bank is less and in the scenario of low and high credit of the policy authority is equivalent to 0.0030 and 0.0036 respectively. Perhaps the reason for this can be found in the oil structure of Iran's economy.ConclusionWe designed a DSGE model for Iran's economy and we estimated the amount of credibility of the monetary policy authority in two fields of inflation rate and exchange rate which are very low. Then, in order to find the optimal discretionary monetary policy under the influence of two scenarios of low and high credibility of the monetary policy authorities, we used the approach of the minimum value of the loss function. To further investigate the model, we analyzed the impulse and response functions for the main variables of the model to productivity shocks, government spending and oil price inflation in two scenarios. In all the input impulses, we found that the high credit of the monetary policy authority causes fewer fluctuations in the key variables of the model compared to the low credit of the policy maker. The results show that when the policymaker has a favorable reputation, the members of the society consider the effects of shocks to be temporary and do not anchor their decisions to it; therefore, even if the policy authority does not implement a specific policy to mitigate the effects of the shock, the variables will stabilize faster than when the credibility of the monetary policy maker is low. Table 1. Variance values of key variables and loss function in different weights to different objectives of the central bank based on the low credibility of the monetary policy maker in IranLoss function The growth rate of moneyExchange rateProductionInflation0.00570.01070950.0001080.0488740.0002550.0001210.1998800.5522740.00006111110.00320.0108780.0000370.0491810.0002390.00012380.2009630.5568540.0000710.510.510.00310.0108370.0001140.0490030.0002470.0001200.2004290.5524500.0000620.50.50.510.00320.0105980.0001360.0484430.0002710.0001240.1971120.5470300.0000300.50.510.50.00300.0108390.00002340.0490700.0002450.0001250.2004830.5571800.0000700.5110.5Source 1: research findingsTable 2. Variance values of key variables and loss function in different weights to different objectives of the central bank under the high credibility of the monetary policy maker in IranLoss function The growth rate of moneyExchange rateProductionInflation0.00710.0109100.0000200.0491810.0002520.0001250.2008670.5545190.00007511110.00430.0109920.0000070.0492830.0002430.0001240.2011880.5528290.0000860.510.510.00420.0109750.0000230.0492140.0002440.0001220.2010130.5503740.0000790.50.50.510.00400.0107380.0000280.0490630.0002700.0001280.1992800.5535860.0000280.50.510.50.00360.0109280.0000060.0492520.0002480.0001270.2010520.5570540.0000810.5110.5Source 2: research finding
Fakhraldin Zaveh
Abstract
This research aims to study the relationship between value-added of the construction sector and the Iranian economy using Iranian National Accounts data for period 1959-2014. The gross domestic product of Iran is broken down into three segments: construction, oil, and the rest, and the cyclical components ...
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This research aims to study the relationship between value-added of the construction sector and the Iranian economy using Iranian National Accounts data for period 1959-2014. The gross domestic product of Iran is broken down into three segments: construction, oil, and the rest, and the cyclical components of each of these variables are extracted. Applying different statistical techniques (correlation, least square regression, and vector autoregressive analysis) along with defining and extracting prolonged relative low-activity periods –times consistent of at least two consecutive periods of negative growth rates of the cyclical component– we have found that: 1) fluctuations of oil sector leads those of the construction and the rest (oil and construction excluded) sectors. 2) prolonged relative low-activity periods in the construction sector often begin concurrent or after the whole economy, and often ends one year later than the whole economy. 3) a shock to the rest sector has a significant impact on the construction sector. 4) the fluctuations in the construction sector do not have a significant effect on the rest sector. All in all, the results provide no evidence that the construction sector leads or drives the Iranian economy.
Farshad Momeni; Ali Nikounesbati
Abstract
Studies show that not only there are important differences between old and new institutionalism, but also new Institutional economics is not a single body of thought. In addition, there are important differences in the assumptions, methods and subject matter between the new institutional economics and ...
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Studies show that not only there are important differences between old and new institutionalism, but also new Institutional economics is not a single body of thought. In addition, there are important differences in the assumptions, methods and subject matter between the new institutional economics and neoclassical economics. Overall, the institutional approach led to major changes in explanations and policy recommendation about development problems, of which, we can mention the emphasize on importance of informal institutions and organizations, the importance of the firm and importance of interdisciplinary approach. Comparing the approaches of institutional and neoclassical economics toward economic growth, as the most important index of development, shows that institutional approach has greater explanatory power and it suggests different policy recommendations. Recent institutional studies show that creation of a democratic and participatory institutional structure is the foundation of economic growth and a prerequisite for the implementation of right economic policies. However, special attention also should be given to poverty and inequality. Therefore, the move towards a democratic structure is the most important institutional reform that should be done in Iran. This is the only practical way to reduce inequality and achieve sustained growth in the country.
Farshad Mo’meni; Farzaneh Samadian
Volume 13, Issue 50 , October 2013, , Pages 17-62
Abstract
This paper reviews the effects of institutions quality on the mechanisms that influence the turning of the blessing of oil resource revenues into a curse for Iranian economy and during 1973-2011. The main research question is that in a situation characterized by inefficient and malfunctioning institutions, ...
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This paper reviews the effects of institutions quality on the mechanisms that influence the turning of the blessing of oil resource revenues into a curse for Iranian economy and during 1973-2011. The main research question is that in a situation characterized by inefficient and malfunctioning institutions, the injection of oil revenue into the economy, how and through which channels, will cause resource curse to happen. This paper also shows that natural resources, like oil, don't lead to disasters per se; but this is the institutional-structural framework in a country and its interaction with the rents of oil revenues that can lead to the curse of natural resources. This study is a descriptive analysis and the analysis has been carried out by using Institutionalism Approach. According to the findings of this research, the negative effects of oil revenues in Iranian economy caused by inefficient and malfunctioning infrastructures and institutions, lead to short-run and long-run decrease in economic growth and resource curse finally. In Iran, oil revenue shows its immediate effect through fiscal policy and the government's budget (oil price effect on government expenditure) and then through budget deficit, it is related to the monetary sector of the economy (great impact of oil price on liquidity).So volatility of oil revenues and the rigidity of the government budget compared with the oil revenues is one of the main channels which the resource curse have been developed in Iran and caused to liquidity growth and inflation. It has important consequences such as increasing imports, decreasing non-oil export and increasing share of value added of services sector in GDP; the increase in the share of value added of services sector in GDP is such that the service sector (mainly brokerage and intermediary services) exceeds more than 50% of Iran's GDP.
Mohammad Reza Moghaddam; Mohammad Reza Sezavar
Volume 12, Issue 47 , January 2013, , Pages 197-216
Abstract
This paper studies the effects of oil prices on macroeconomic variables such as economic growth, inflation and unemployment rate by using structural vector autoregressive method. The results show that oil price shocks are the main source of fluctuations of inflation rate, while economic growth is affected ...
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This paper studies the effects of oil prices on macroeconomic variables such as economic growth, inflation and unemployment rate by using structural vector autoregressive method. The results show that oil price shocks are the main source of fluctuations of inflation rate, while economic growth is affected by supply shock and unemployment rate is affected by shocks in labor market. Also, it is necessary to improve the credibility of monetary and fiscal policies for economic agents to achieve better results.
Naserali Yadolahzadeh Tabari
Volume 11, Issue 41 , July 2011, , Pages 51-70
Abstract
Inflation targeting as an monetary policy framework, requiring some
prerequisites to warrant its prosperity. This research tends to investigate the
applicability of inflation targeting to Iranian economy. Our findings on the existence
of potential monetary policy instruments in order to control the ...
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Inflation targeting as an monetary policy framework, requiring some
prerequisites to warrant its prosperity. This research tends to investigate the
applicability of inflation targeting to Iranian economy. Our findings on the existence
of potential monetary policy instruments in order to control the inflation indicate that
exchange rate can be used in short term, but the over-emphasis and over
dependency on it, is not suggested in inflation targeting.
Deposit rates are officially determined not based on economic conditions, and
had negligible effect on economic variables, so using the deposit's rates as an
instrument to control the inflation is impossible. The effects of money supply on the
price level in the short- term is low, in the mid-term is moderate, and its maximum
effect revealing in the long- term; thus the money supply cannot be used as a very
effective instrument of monetary policy, for the proper time horizon in inflation
targeting framework is approximately two years.
Hamid Mohammadi; Bahaadin Najafi; Vahid Dehbashi
Volume 11, Issue 40 , April 2011, , Pages 213-239
Abstract
This study aims at investigating the impacts of increased export price of agricultural products on macroeconomic variables of Iranian Economy. To get the objective, Computable General Equilibrium (CGE) and Social Accounting Matrix (SAM) of 1380 was used. The results showed that with ...
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This study aims at investigating the impacts of increased export price of agricultural products on macroeconomic variables of Iranian Economy. To get the objective, Computable General Equilibrium (CGE) and Social Accounting Matrix (SAM) of 1380 was used. The results showed that with increase in export price of agricultural commodities, irrespective of exchange rate, GDP, private investment rate and tax revenues will increase, however, production and consumption of commodities will decrease under flexible exchange rate and will increase in nonflexible exchange rate regime. It was also revealed that investment use of commodities tend to decrease under flexible exchange rate and it is expected to increase as nonflexible exchange rate policy is imposed. Agricultural and nonagricultural prices will also decrease (increase) in flexible (nonflexible) exchange rate conditions.
