محمدامین صادق زاده

The prevalent narrative regarding the surge of inflationary pressures in the Iranian economy over the past five years emphasizes the growth of lending by the banking system. Monetary policy over the last few years has also focused on limiting the growth of broad money aggregates. However, despite a substantial reduction in the growth rate of M2, the rate of inflation has persisted above the long-run trend. Naturally, questions arise whether higher rates of inflation since 1397 are the consequence of higher monetary growth rates or whether other factors can explain the recent bouts of elevated inflationary pressures. Moreover, how effective is the announced policy of targeting the growth rate M2 aiming at reducing the inflation rate in the short and the long run? The present study proposes that the concurrence of three different but related factors - exchange rate fluctuations, weakening of asset demand for rial, and the lack of an effective policy anchor to curb inflationary expectations - provide a more accurate and complete narrative than a simple monetary explanation. We employ a structural vector autoregression model for short-run analysis and a vector error correction specification for the long-run analysis to identify which macroeconomic variables have had a more significant role in generating inflationary pressures during the 1367Q2-1402Q2 period.

More recent research indicates that the effect of monetary policy is state-dependent. This paper conjectures that the impact of monetary shocks on output and inflation in the Iranian economy is contingent on state of the economy, reflecting the size of oil revenue streams, which closely approximates economic cycles. Limited access to international financial markets together with fiscal spillovers emanating from financing of government expenditures and fiscal deficit finance, in a fiscally dominant environment, are the main contributing factors in this respect. To address the state-dependent effectiveness of monetary shocks in the Iranian economy during the period 1990-2017, we utilized a two-stage nonlinear SVAR model. First, the monetary and fiscal shocks were identified by a short term zero-restriction method in which fiscal dominance was taken into account as an amplification mechanism for fiscal shocks. Then, we used a smooth transition auto regressive (STAR) method proposed by Auerbach and Gorodnichenko (2012) to decompose boom and bust oil revenue cycles. Finally, the asymmetric effects of monetary shock on output and inflation in expansion and contraction phases were analyzed by impulse response functions estimated using local projection method developed by Jorda (2005). Our findings demonstrate that the reactions of output and inflation to monetary shocks are asymmetric and state-dependent over oil revenue cycles. While the impact of monetary shocks on output is positive and significant only in the expansionary phases, the positive reaction of inflation to monetary shock is stronger and more persistent in oil revenue scarce periods rather than abundant ones.

There have been many studies on the effect of the central bank independence and monetary policy on inflation, implying that more independent central banks are more successful in taming inflation. The same theoretical background could be applied to examine the effect of central bank independence on the real sector of the economy. We examine the relationship between the central bank independence and the stability of economic growth by using LVAW index for 43 countries over 1989-2000. Our empirical results show a negative relationship between the central bank independence and deviations of economic growth. Therefore, more independent central banks provide better economic environment for stable economic growth.