Evaluating the Effectiveness of the Policy Interest Rate in Implementing the Inflation Targeting Framework in Iran

One of the most important monetary policy targets is price stability. In the framework of inflation targeting, the central banks use the policy interest rate to implement their monetary policy, especially in the last decade. In the Iranian economy, there are various discussions about the effectiveness of the policy interest rate to guide the inflation rate, and it is argued that since the channels of the policy interest rate effect are incomplete in the Iranian economy, this tool isn’t efficient enough to guide the inflation rate. This study investigates the quantitative effect of the policy interest rate change on macro variables and evaluates the effectiveness of the policy interest rate tool in the implementation of inflation targeting, by a vector error correction model for Iran's macroeconomics. The results indicate that despite the shortcomings of the interest rate influencing channels on macroeconomic variables, the increase in the policy interest rate has strong anti-inflationary effects in such a way that an increase of 1 percentage point in the policy interest rate causes a 1.3 percentage point decrease in inflation after 24 months. Therefore, the results indicate that the policy interest rate in Iran's economy, despite the shortcomings of influence channels, is efficient enough to guide the inflation rate