Maryam Mirzayi; Seyed Jamaledin Mohseni Zonouzi; Hossein Asgharpur
Abstract
Introduction
The study of monetary evolution in the world points to the fact that many countries, in certain circumstances, have had to implement monetary reforms in different ways. The most important reasons that have made these countries to perform such programs were the inefficiency of system of ...
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Introduction
The study of monetary evolution in the world points to the fact that many countries, in certain circumstances, have had to implement monetary reforms in different ways. The most important reasons that have made these countries to perform such programs were the inefficiency of system of monetary transactions liquidation and the inability of national currency in fulfilling the expected duties which have been mainly resulted from continuous high rates of inflation.
Modifying the currency or removing a few zeros from the country's currency has become one of the Iran's economic needs for facilitating trade exchanges. This is a subject that has been on the agenda of the Central Bank since many years ago. The removal of zero from national currency is an action aimed at increasing the nominal value of money. Therefore, considering the current state of inflation in Iran in recent years and the government's determination to implement an economic transformation plan, part of which is a change in the currency and the benefits provided for this policy, process of conducting and reviewing the effects Such an action seems to be extremely necessary for controlling inflation. This study is an attempt to identify the different dimensions of monetary reform plan with respect to the results obtained from implementing the afore-mentioned plan in certain countries. From an inflation perspective, this policy has been investigated in two ordered Probit and Panel data models.
Theoretical Framework
Monetary reform or currency redenomination is a policy making and planning aimed at improving the national currency of a country. It is a series of structural and monetary reforms that by adopting monetary policies supports foreign exchange and financial policies to maintain the value of national currency in the domestic (the stability of the general level of prices or inflation rate) and foreign (Maintaining equivalence with other currencies) context. The other category of monetary reform focuses only on surface changes, which is usually the concept of changing the currency of a banknote. And it can be categorized into three general categories of changing the name of the currency of one country, the removal of a few zero of the currency and a combination of both. In some cases, it has been seen that the countries, together with the reformation of the banknotes, are attempting to change the rate of national currency equivalents with the global currencies. In addition, the formation of monetary unions, such as the euro monetary union, is also assessed as a monetary reform (dogarawa, 2010).
In general, countries with high inflation have been to implement monetary reform and have benefited from it, but studies have shown that due to high research and operational costs of monetary reform, these countries did not implement it except in emergency conditions. It is noteworthy that some countries that engage in this reform have experienced a 5000 percent inflation, and almost all countries that have changed their currency have experienced inflation above 100 percent. One of the common features of countries that have implemented monetary reform is providing arrangements to do it. All the countries that have been reforming have somehow benefited from implement monetary reform, which initially controls inflation with corrective actions and policies. In fact, those countries that didn’t consider inflation control, accepted the heavy costs of changing monetary unit, they needed to make another adjustment in their currency in the next two to five years (Lots, 2004).
In addition to the above, another common point in the countries’ experience of successful implement of the monetary reform is to include this program in the policy package of financial stability. In other words, in most of these countries, a program for structural reform of the financial sector was pursued with the aim of achieving the conditions for the stabilization of which the monetary reform program was part of it. Economic policymakers in countries facing unwieldy inflation will have to make decisions for international funds, along with gaining confidence in the public opinion. The most direct tool for controlling inflation and achieving the above goals is to implement the economic stability program. The program is usually set up on the basis of the exchange rate or monetary approach, which the IMF also supports it through an agreement (Malekan, 2010). The currency redenomination program is very successful when implemented in a stable economic environment, falling inflation, stable exchange rates, financial discipline, and rational and prudent expectations of the credibility of economic stabilization policies (Ishi Kueen, 2007).
Methodology
The specification of the research model has been done in the form of two probit and panel data models. The statistical population was used in the prime probit model is a sample of 29 countries that had the policy of reforming the national currency during periods 1921 to 2000, which is based on the data collected by Bernholz and Kugler (2006). In the panel data model, the data of 20 countries implementing the currency redenomination program during 1985 to 2013. The statistical sources used in this model are World Bank, WDI and IFS software.
The below probit model is employed:
Yi = f(D1i, D2i, D3i) (1)
In which, y as a dependent variable is the degree of success of the policy to change the monetary unit (zero elimination) in controlling inflation in the selected countries and includes values 0, 1 and 2 (value of 2 for the fully successful countries, value of 1 for relatively successful countries and zero for unsuccessful countries). D1 is a virtual variable for financing the state budget deficit, which is 1 if not financed by the state budget deficit through the issuance of the banknote, otherwise it will be zero. D2 is a virtual variable for the independence of the central bank, which is 1 if the central bank is independent in the country, and otherwise has a zero value. D3 is a virtual variable for the country's currency system, which is 1 for the fixed exchange rate system and otherwise it is zero.
The below Panel Data model is employed:
infi = f(dGDPi, dM2i, D1i, D1i D2i, D1i D3i, D1i D4i) (2)
where inf , the dependent variable of the model is indicative of the rate of inflation in the selected countries and extracted from the World Bank. dGDP is the real Gross Domestic Product growth rate (1985 base). dM2 is the growth rate of liquidity, and is extracted from the World Bank. D1, the virtual variable is related to the elimination of zero of national currency, so that the value of this variable in the years when the zero removal policy in the target country has been implemented is equal to one and in the rest of the years is zero. D2, the virtual variable is the percentage of central bank independence in the studied countries. D3, the virtual variable is related to the government financing through the issuance of a banknote, which issue the value 1 if the government finances, otherwise the value will be zero. D4 , the virtual variable is related to the foreign exchange system of the country, which, if there is a fixed exchange rate system, is 1, and for other currencies (floating or floating) is zero.
Results and Discussions
Based on the results of the probit model estimation, it can be concluded that there is a positive and significant relationship between the degree of success of currency redenomination policy in controlling inflation and the way of financing the deficit of the state budget. There is an inverse and meaningless relationship between the independence of the central bank and the degree of success of currency redenomination policy in controlling inflation. There is a positive and significant relationship between the fixed currency system and the degree of success of currency redenomination policy.
The results of the panel data model show that the currency redenomination policy has a positive effect on inflation and increases inflation. Also, the effect of currency redenomination policy despite the independence of the central bank in the studied countries is in accordance with expectations and has negative effect on inflation. Also, the implementation of currency redenomination policy in the case of government financing with the issuance of a banknote has a positive and significant relationship with inflation and has led to the failure of the policy. But the effect of implementing the currency redenomination policy despite the fixed exchange rate system in the studied countries has inverse and meaningless relation with inflation.
Conclusions and Suggestions
By summing up the results of the two models used in the research, it can be said that the independence of the central bank, the lack of financing by the government through the issuance of banknotes and the existence of a fixed exchange system in the country, are the infrastructure necessary to succeed implementing the policy of elimination Zeros from the national currency. Therefore, if such a policy is to be adopted in Iran, then there must first be established the policies for controlling inflation and appropriate infrastructures and then implement the policy.
