Evaluation of the Degree of Coordination between the Monetary and Fiscal Policies in the Iranian Economy and the Requirements for Achieving it

Monetary and fiscal policy coordination means that these policies, despite their different targeting priorities, move in one direction or at least do not neutralize each other in order to reach economic growth and price stability. The lack of coordination between monetary and financial authorities will lead them to fail to achieve the economic goals. Accordingly, this study will assess the coordination of monetary and fiscal policies in the Iranian economy. The question is whether monetary and fiscal authorities have been coordinated in the Iranian economy. In order to answer this question, in this study, coordination between monetary and fiscal policies has been evaluated during 1367-1398 (with annual frequency) using the Granger causality test and the Engle-Granger integration test in the long run and in the short term using the approach of Arby et.al (2010) and Tarawalie et.al (2013). The results of the Granger causality test and the Engle-Granger integration test emphasize the lack of a long-term relationship between the two policies. Also, the evaluation of their coordination in the short term confirms that the coordination of these two policies in different economic situations in the first to third lags is equal to 0.21, 0.16 and 0.27 respectively. These results indicate the weak interaction between monetary and fiscal policymakers in their efforts to achieve sustainable economic growth and price stability. The coordination requires the institutional and operational arrangements, including the implementation of monetary and fiscal policy rules, the establishment of a legal framework for central bank independence, government debt management, and the establishment of a monetary and fiscal policy coordination council .A review of economic statistics shows that countries that have implemented fiscal rules and an inflation targeting framework simultaneously, have lower debt-to-GDP ratios and lower inflation rate than countries that have implemented these rules separately. Therefore, in order to overcome the economic recession and reduce the inflation rate, it is suggested that the government and the central bank implement the fiscal rules and flexible inflation targeting simultaneously in order to achieve the fiscal and monetary policy coordination.