Comparing Effects of Monetary Shocks Caused by Monetary Base and Monetary Multiplier in Iranian Economy

Dargahi, Hassan; Hadian, Mehdi

doi:10.22054/joer.2018.8567

Document Type : Research Paper

Authors

Hassan Dargahi ¹
Mehdi Hadian ²

¹ Associate Professor of Economics, Shahid Beheshti University

² Ph.D. in Economics Shahid Beheshti University, Tehran

https://doi.org/10.22054/joer.2018.8567

Abstract

Designing a New-Keynesian dynamic stochastic general equilibrium model, in this paper, we evaluate the impacts of monetary shocks originated from monetary base and monetary multiplier on fluctuations of macroeconomic variables in Iranian economy. Due to importance of financial sector in transmition of economic policies effects, banking system and its current status such as fixed asset accumulation and NPLs has been added to the baseline model. Calibration of parameters of model according to quarterly data of Iranian economy during period 1990-2014 shows that the model fits the data quite satisfactorily. We find that a negative shock to reserve requirement results in slight output growth and inflation while a positive shock to banks’ borrowing from central bank results in output decline and higher inflation. In other words, for the same amount of liquidity growth, increasing of liquidity from a change in monetary multiplier, in contrast to change in monetary base, results in lower inflation and stimulating output. Therefore, it has been suggested that monetary authority should control the amount of borrowings made by banks and, instead, decreases their reserve requirement ratio as an incentive tool. This approach will encourage banks to adhere to their credit line limits and avoid overdrafts which result in higher level of stability in macroeconomic variables through monetary discipline.

Keywords

References

بانک مرکزی جمهوری اسلامی ایران، نماگرهای مختلف.

پروین، سهیلا، عباس شاکری و اعظم احمدیان (1393)، «تحلیلی بر تاثیر شوک‌های ترازنامه‌ای نظام بانکی بر تولید و تورم در اقتصاد ایران»، فصلنامه پژوهشنامه اقتصادی، 14 (1):186-149.

شاه‌حسینی، سمیه و جاوید بهرامی (1391)، «طراحی یک مدل تعادل عمومی پویای تصادفی کینزی جدید برای اقتصاد ایران با در نظر گرفتن بخش بانکی»، پژوهش‏های اقتصادی ایران، 17(53): 55-83.

نوفرستی، محمد (1384)، «بررسی تاثیر سیاست های پولی و ارزی بر اقتصاد ایران درچارچوب یک الگوی اقتصاد سنجی کلان پویا»، تحقیقات اقتصادی، 40(70): 1-29.

Armas, A., P. Castillo and M. Vega (2014), “Inflation Targeting and Quantitative Tightening: Effects of Reserve Requirements in Peru”, Economía, 15(1), 133-175.

Agénor, P. R., K. Alper and L. A. P. da Silva (2014), “Sudden Floods, Macroprudential Regulation and Stability in an Open Economy”, Journal of International Money and Finance, 48, 68-100.

Angelini, P., S. Neri and F. Panetta (2014), “The Interaction between Capital Requirements and Monetary Policy”, Journal of Money, Credit and Banking, 46(6), 1073-1112

Bhattacharya, J., and J.H. Haslag (2003), “Is Reserve‐ratio Arithmetic More Pleasant?”, Economica, 70(279), 471-491.

Blanchard, O., and R. Perotti (1999), An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output (No. w7269), National Bureau of Economic Research.

Brunner, K. (1981), The art of central banking, Graduate School of Management, University of Rochester.

Burriel, P., J. Fernández-Villaverde and J. F. Rubio-Ramírez (2010), “MEDEA: A DSGE Model for the Spanish Economy”, SERIEs, 1(1-2), 175-243.

Calvo, G. A. (1983), “Staggered Prices in a Utility-maximizing Framework”, Journal of monetary Economics, 12(3), 383-398.

Canova, F. (1995), “Sensitivity Analysis and Model Evaluation in Simulated Dynamic General Equilibrium Economies”, International Economic Review, 477-501.

Carrera, C., and H. Vega (2012), “Interbank Market and Macroprudential Tools in a Dsge Model”, Central Bank of Peru Working Papers, (2012-014).

Chowdhury, I., and A. Schabert (2008), “Federal Reserve Policy Viewed Through a Money Supply Lens”, Journal of Monetary Economics, 55(4), 825-834.

Cohen, E., and E. Martinez (2010), “The Balance Sheet Channel”. In R. Alfaro (Ed.), Financial stability, monetary policy, and central banking: Vol. 15 (pp. 255-297). Santiago, Chile: Central Bank of Chile.

Friedman, B. M. (1984), Lessons from the 1979-1982 Monetary Policy Experiment”, American Economic Review, Vol. 74, No. 2, (May 1984), pp. 382-387.

Friedman, B. M., and K. N. Kuttner (2010), Implementation of monetary policy: How do central banks set interest rates?, (No. w16165). National Bureau of Economic Research.

Gerali, A., S. Neri, L. Sessa and F. M. Signoretti (2010), “Credit and Banking in a DSGE Model of the Euro Area”, Journal of Money, Credit and Banking, 42(s1), 107-141.

Glocker, C., and P. Towbin (2012), “Reserve Requirements for Price and Financial Stability-When are they Effective?”, Banque de France Working PaperNo. 363.

Goodfriend, M., and B. T. McCallum (2007), “Banking and Interest Rates in Monetary Policy Analysis: A Quantitative Exploration”, Journal of Monetary Economics, 54(5), 1480-1507.

Gray, S. (2011), Central Bank Balances and Reserve Requirements (No. 11-36), International Monetary Fund.

Handa, J. (2009), Monetary Economics, by Routledge.

Haslag, J. H., and S. E. Hein (1995), “Does it Matter how Monetary Policy is Implemented?”, Journal of Monetary Economics, 35(2), 359-386.

McCallum, B. T. (1984), Monetarist Rules in the Light of Recent Experience, NBER Working Paper Series Working Paper No. 1271

Prada Sarmiento, J. (2008), Financial Intermediation and Monetary Policy in a Small Open Economy, BANCO DE LA REPÚBLICA. Working Paper No. 531.

Ravenna, F., and C. E. Walsh (2006), “Optimal Monetary Policy with the Cost Channel”, Journal of Monetary Economics, 53(2), 199-216.

Sargent, T. J., and N. Wallace (1984), Some unpleasant monetarist arithmetic(pp. 15-41). Palgrave Macmillan UK.

Snowdon, Brian, and Howard R Van (2005), Modern macroeconomics: Its Origins, Development and Current State: Edward Elgar Publishing.

Uhlig, H. (1999), “A Toolkit for Analyzing Nonlinear Dynamic Rational Expectations Models Easily”, Computational Methods for the Study of Dynamic Economics, 150-200.

Walsh, C. E. (2010), Monetary Theory and Policy, MIT press.

Economics Research

Comparing Effects of Monetary Shocks Caused by Monetary Base and Monetary Multiplier in Iranian Economy

References

References

Volume 17, Issue 67
January 2018
Pages 189-219

Comparing Effects of Monetary Shocks Caused by Monetary Base and Monetary Multiplier in Iranian Economy

References

References

Volume 17, Issue 67January 2018Pages 189-219

Volume 17, Issue 67
January 2018
Pages 189-219