Esmaeil Mirzaei; sharam fattahi; Mohammad Sharif Karimi
Abstract
1- INTRODUCTION
Since the collapse of the Bretton Woods system in 1973 and the adoption of floating exchange rate system, exchange rate volatility (ERV) has become a central issue and concern for various groups of agents including policy makers, central banks, academics and individual ...
Read More
1- INTRODUCTION
Since the collapse of the Bretton Woods system in 1973 and the adoption of floating exchange rate system, exchange rate volatility (ERV) has become a central issue and concern for various groups of agents including policy makers, central banks, academics and individual investors among others. Central bank transparency (CBT) is one of the possible factors which can reduce exchange rate or generally exchange rate volatility that increase it's in has been one of the main developments in central banking in the past few decades. Thus, this leads to the question of the effect of central bank transparency on the volatility of exchange rates. The most important inferred from the previous literature on the issue of central bank transparency is that the increase of information provision by the central banks in the form of communication of monetary policy will lead to an increase in the ability of people to understanding the objectives of the central bank and improve their forecasts from the monetary policy of the central bank, which will prevent changes in the central bank's policy stance from destabilizing financial markets , which this could be required existing an independent central bank. Due to the fact that in oil exporting countries, especially OPEC member countries, the move towards more transparent monetary policy has been slow, thus the increase in central bank transparency and existing an independence of the central bank can have been decreasing effect on exchange rate volatility. Also, this study used the Extended Central Bank Independence (ECBI) index is the newly created index of central bank independence (CBI). Therefore, the purpose of this study is to examining the impact of central bank transparency on exchange rate volatility in Selected OPEC Member Countries to use two approaches Fully Modified Ordinary Least Squares (FMOLS) and Dynamic Ordinary Least Squares (DOLS) that in perversion research have been ignored.
2- THEORETICAL FRAMEWORK
According to the existing literature, CBT is said to be based on performing several tasks: the clear formulation of monetary policy objectives, the regular publication of economic outlooks and forecasts, the disclosure of methods, the regular publication of press releases and minutes of monetary policy meetings, and the regular organization of press conferences and other meetings with media and the public. As central banks have been moving towards more transparent policies over the last two decades, some of them started publishing their own forecasts on the future state of the economy. Projections of future growth rate of GDP and inflation rate are but two examples of such forecasts. These changes in the practice of central banking resulted in considerable growth in the literature. The aspect of transparency people is interested in has to do with release of central bank projections of the future state of the economy. Of course, if, that there is no strategic attempt to manipulate the public's beliefs and in this context with the people have been truthful. One of the main goals of most central banks is to stabilise the economy and reduce economic fluctuations. This includes a reduction in inflation volatility, output variation, and exchange rate volatility. Blinder (1998) argues that a nation's central bank should explain its actions to the people, so as to remove the mystery behind the decision - making process. If the bank cannot provide a clear explanation of a decision, then the decision may not be a good one. Thus, that more open public disclosure of central bank policies may enhance the efficiency of financial markets. First, greater information about how a central bank makes policy decisions would curtail excessive speculation. Second, clearer decision rules on the part of the central bank would help to reduce the volatility of markets, and thus enhance the predictability of future movements of financial assets. Crowe & Meade (2008) argues, as central banks have become more independent, so the demand for transparency has increased, both for reasons of accountability and legitimacy, and to guide the expectations of financial market participants (whose appetite for information has expanded as financial markets have become broader and deeper).
3- METHODOLOGY
The purpose of this study is to examine the impact of CBT on ERV in selected OPEC member countries (for the six OPEC countries that consisting of United Arab Emirates, Iran, Iraq, Kuwait, Nigeria and Saudi Arabia) with the help of annual panel data for 1998-2019. In this study, to analyze the tests related to panel data and model estimation employed two approaches FMOLS and DOLS have been used from Eviews and Stata softwares.
4- RESULTS & DISCUSSION
In this step, we check whether the variables have a unit root using the Maddala & Wu (1999) Fisher test that adopts an augmented Dickey–Fuller test for panel data. According to the results of the tests stationarity and cointegration, FMOLS and DOLS methodologies were used to estimate the long relationships. The findings of this study in the both approaches showed that CBT and CBI are the effective variables on ERV and have a negative and significant in relation to ERV. The findings of this study confirm that oil rent and GDP growth have a negative and significant in relation to ERV, also.
5- CONCLUSIONS & SUGGESTIONS
As a novelty for the first time, this study found the overall relationship between CBT and ERV emissions which came to be negative in selected OPEC member countries using annual panel data over the period 1998-2019. This showed that an increase in CBT would lead to a reduction in ERV emissions. According to the results of this study the central bank transparency is considered a positive measure and often due to its benefits and high flexibility to stabilize the economy can reduce exchange rate volatility. However, empirical evidence of such benefits has not yet been considered in oil exporting countries. The findings of this study show the importance of central bank transparency in selected OPEC member countries which in an independent environment of the central bank can play a role in reducing exchange rate volatility. The more stable, less volatile, and more secure the financial markets, including the exchange rate market can increase gdp growth.
samira zareinezhad; kiomars sohaili; Shahram Fattahi
Abstract
Extended abstract
1- INTRODUCTIO
In order to have an effective monetary policy, it is necessary for the monetary authorities to have sufficient information about the effect, the channels of start the effect, the duration of the effect and the time when the effect of the monetary policy effect peaks. ...
Read More
Extended abstract
1- INTRODUCTIO
In order to have an effective monetary policy, it is necessary for the monetary authorities to have sufficient information about the effect, the channels of start the effect, the duration of the effect and the time when the effect of the monetary policy effect peaks. Therefore, it is necessary to examine the intersection of credit channel, housing price channel, stock price channel and exchange rate channel in the nonlinear transmission mechanism of monetary policy on inflation in the Iranian economy. It has a structure in different regimes and the data of the central bank are used during the years1978-2017.
2- THEORETICAL FRAMEWORK
Monetary policy is a set of actions that the central bank (monetary authority) through monetary instruments affect many economic goals such as price stability, exit from recession, stimulation of economic growth and increasing employment. This effect of monetary policy on the set goals and improvement in macroeconomic performance will indicate the efficiency of monetary policy. Central banks, as monetary policy makers in most countries of the world, seek the effectiveness of their monetary policies and to better understand the structures governing their economic environment in order to implement appropriate and timely policies and put economic variables on the path of growth and development. In this regard, how to formulate monetary policy and use monetary instruments is of particular importance in macroeconomics.
3- METHODOLOGY
A novel feature of the Markov switching model is that the regime change mechanism in this model depends on a status variable. in other words, the recent value of the state variable just depends on the its value in previous periods. to calculate the unconditional probabilities in a model that include two regimes indicate the probability of being in each regime, we can consider the possibility of changing the parameters in different regimes, the linear VAR model transforme the MSVAR model:
4- RESULTS &DISCUSSION
The role of the exchange rate channel in transferring money to inflation is positive in both regimes, meaning that it increases inflation. Given the structure of the Iranian economy and due to the high dependence on the price of finished products of domestic production to imported capital goods, it seems that the exchange rate will play a dominant role in determinayion the fate of inflation in the Iranian economy.
The role of housing price channel in transferring money to inflation in regime one increases inflation and negative effects on monetary policy in Iran’s economy, while in regime two, housing price channel in transferring money to inflation has played the largest share in reducing inflation.
The role of corporate credit channel in transferring money to inflation in the regime has a greater share than the second regime in transferring money to inflation. As a result, in economic policies, special attention should be paid to the inflationary effects if the granted facilities.
Stock price channel, support of the stock market should be one of the main priorities of officials. Because in the Iranian economy, which is always involved in high inflation, the stock market without inflationary effects can increase investment to increase production.
5-CONCLUSIONS & SUGGESTIONS
According to our results, it is suggested that to control inflation, policymakers should pay special attention to changes in currency price. At the same time, the policymaker can reduce the dependence of the country's industry on the import of capital goods and strengthen domestic financial instruments, such as the return on bank deposits, stock exchanges, etc. To strengthen other transfer channels so that it can rely on other channels to control inflation.
kiomars sohaili; Shahram Fattahi; Mahnaz Sorkhvandi
Abstract
Introduction
Monetary policies are one category of economic policies. Central banks use monetary policies for reducing inflation and for increasing production, employment and economic rate growth. Implementation of monetary policies can be done as a rule based monetary policy or as a discretionary ...
Read More
Introduction
Monetary policies are one category of economic policies. Central banks use monetary policies for reducing inflation and for increasing production, employment and economic rate growth. Implementation of monetary policies can be done as a rule based monetary policy or as a discretionary monetary policy by central banks. Discussion of rule based monetary policy and discretionary monetary policy is of the most important issues of monetary policy making. In the case of discretionary monetary policies, central bank authorities react to their discretion in various economic conditions and based on the various situations of macroeconomic variables such as inflation and economic growth rates. But in the case of systematic monetary policies, central bank authorities will react to fluctuations in the economy, based on economic theory and monetary rules. Estimation of the amount of regulation or discretion of monetary policy is of special importance. Hence, in this study, the issue of rules versus discretion in monetary policies of Iran’s central bank will be examined.
Theoretical Frame work
Friedman's (1969) monetary rule is one of the monetary rules based on which regulatory based monetary policies are executed. Friedman's monetary rule was known as the main monetary rule for many years. Friedman believes that in situations where there is uncertainty about the duration of the effectiveness of monetary policy, the discretionary management of the supply of money can increase economic volatility, so he has proposed constant growth monetary rule. Other monetary rules whose application in Iran is investigated in this paper, are Taylor rule and the augmented Taylor rule. Taylor rule and the augmented Taylor rule are the most famous specified reaction function in the economic literature. According to the Taylor rule and the augmented Taylor rule, monetary policymakers react to deviations of output from the potential output and deviations of inflation from target inflation through change in the interest rate as a policy instrument. It is worth noting that due to the rule of interestfree banking system in Iran and due to Iran's central bank’s use of monetary based policies as an intermediate target in monetary policy, in this study, the growth rate of monetary base has been used instead of the interest rate.
Methodology
In order to examine the amount of regulation of the monetary policies of Iran Central Bank, the following two models were designed
The first model is specification of model for augmented Taylor rule under the first scenario for target inflation:
BM = C(1) + C(2)*BM(-1) + C(3)*GDPGAP + C(4)*INFGAP
The second model is specification of model for augmented Taylor rule under the second scenario for target inflation
BM = C(1) + C(2)* BM (1-) + C(3)*GDPGAP + C(4)*INFGAPT
In the above models, BM, BM (-1), GDPGAP and INFGAP are monetary base, the first lag of monetary base, deviations of the actual GDP from potential GDP and deviations of the inflation from target Inflation, respectively. Also, C(1), C(2), C(3) and C(4) are variable coefficients. The above models are estimated using the least squares regression during the period 1974-2013. The results of estimated models are reflected in the results and discussion part.
Results and Discussion
The results obtained from the estimated equations for central bank's response showed that the coefficient of policy variable of deviations of the actual GDP from potential GDP is significant. But the coefficient of deviations of the inflation from target inflation is not significant. Hence, findings of this research indicate that the behavior of the central bank of Iran with respect to deviations of the actual GDP from its potential is systematic and is based on rule than discretion. But the behavior of the central bank of Iran with respect to deviations of the inflation from target inflation was based on discretion and has not been systematic or rule based during the study period
Conclusion and Suggestions
Determination of monetary policies based on the discretion instead of determination of them based on rule, often cause inflation and economic instability in Iran. Therefore, in order to reduce social loss of intensifying inflation such as class discrimination and creating appropriate atmosphere for economic growth, the reaction functions of central bank of Iran in response to inflation deviations from its target and deviations of the actual GDP from its potential, is defined. Since lack of central bank’s independence leads to the discretionary behavior, reducing dependency of the central bank to the government is suggested for establishing a systematic behavior in the monetary policies of central banks.
sharam fattahi; Kiomars Sohaili; Sara Lorestani
Abstract
Financial assets are particularly important in the saving -investment process, because Investments in financial assets is considered as the engine of production and economic growth in each country. Economic growth and Production increase in a country depends on its ability to produce financial assets. ...
Read More
Financial assets are particularly important in the saving -investment process, because Investments in financial assets is considered as the engine of production and economic growth in each country. Economic growth and Production increase in a country depends on its ability to produce financial assets.
Financial assets shortage certainly creates defects in the market. In this case, either the savings are not sensitive to interest rates or supply assets alone are not responsive to interest rates. Also, capital markets are inefficient. For example, non-competitive markets, increase transaction costs, asymmetric information and poor performance of property rights. These problems are most severe in emerging markets and prevent the issuance of financial assets. However, marker inefficiency, market efficiency, due to investment constraints is caused by the imperfect mobility of capital in the world as well as deviations in the valuation of assets.
Methodology
Asset shortage index is determined according to the supply and demand for financial assets. Domestic demand for assets is determined by gross domestic savings (i.e. all accessible resources for investment) while the supply of financial assets is shown as published domestic bonds, stock loans, foreign assets and net domestic assets by foreign investors and changes in short-term deposits. Asset shortage index that shows assets shortage and available financial instruments for investment in the society as calculated by the following formula:
Where S is the domestic national savings, B is the bond issuance in the domestic market, E is the equity issuance in the domestic market, L is the loan issuance in the domestic market, and S.D. is the short-term deposits. NPFA is the net purchase of foreign financial assets by domestic residents, which reflects the position of domestic investors’ holdings of foreign assets (debt, equity, financial derivatives, other investments) minus the net position of foreign investors’ holdings of domestic assets. The sum of B, E, L, ΔS.D, and NPFA is therefore a reflection of the supply of financial assets.
Results and discussion
In Iran, supply growth in financial assets is less than the demand growth assets and Iran's economy is dominated by the relative assets shortage. To check this, the effectiveness of some of the macroeconomic variables on the asset shortage index is evaluated during the period 1389-1370. The used specified model is ARDL.
The Results of Estimated Long Run ARDL Model
Variables Coefficient Std. Error t-Statistic Prob
Constant -.35269 .10746 -3.2820 .017
LN )GDP( -.14138 .01416 -9.9840 .000
INF .01634 .00139 11.751 .000
RER .226E-4 .43E-5 5.2469 .002
)IR( .05946 .01182 5.0304 .002
GFB .106E-5 .25E-6 4.2411 .005
WG -.01174 .00342 -3.4337 .014
T .04737 .00256 18.455 .000
The results of estimated equation above show that the long-term coefficients of all variables in the model are statistically significant. The coefficient of log variables GDP growth rate of global GDP growth rate is negative in the above equation, which reflects the fact that, economic growth in Iran and global economic growth relative have the potential to reduce the asset shortage index. Also, the coefficients of the variables inflation rate, the real exchange rate, interest rate fluctuations, government and financial balance in the long-term trend have the positive signs. These positive coefficient indicates that a stable economic environment, stable exchange rate policy (stability of the exchange rate greatly reduces the risk policy), lack of volatility interest rates and a better financial position encourage the issuance of new financial assets and a decrease the asset shortage index.
Conclusion
Short-term and long-term results of the estimation ARDL method shows that a significant positive relationship between changes in interest rates and asset shortage. The results also show that inflation has the significant positive impact on the assets shortage index. According to the results obtained from the estimated long-run equilibrium relationship and dynamic model, the inverse correlation between economic growth and financial assets shortage was confirmed. Therefore, higher economic growth can decrease financial asset shortage index both in short run and long run. In addition, the direct and significant impact of real exchange rate on asset shortage index was also confirmed. Of course, the real exchange rate in the short run with no lag has negative coefficient and with a lag has a positive coefficient. But the whole result of these two coefficients has positive value. According to the results, the government deficit has a direct impact on reducing the financial assets shortage both in the short run and long run. Finally, it should be noted that a significant inverse correlation exist between the growth rate of world GDP and the financial assets shortage in Iran.
