yazdan gudarzi farahani; Omidali adeli
Abstract
1- INTRODUCTION
The effect of monetary policy on the exchange rate in the Dornbusch’s point of view is that unpredictable changes in the money supply play a major role in exchange rate fluctuations. In a fixed exchange rate system, keeping the country's currency stable against foreign ...
Read More
1- INTRODUCTION
The effect of monetary policy on the exchange rate in the Dornbusch’s point of view is that unpredictable changes in the money supply play a major role in exchange rate fluctuations. In a fixed exchange rate system, keeping the country's currency stable against foreign currency stabilizes a country's currency and provides grounds for increasing the credibility of policy makers; at the same time, the floating currency system provides the basis for removing the effects of external shocks from the economy. In addition, the use of a fixed exchange rate system has reduced the uncertainty of the real sectors of the economy, and this issue can improve international trade and domestic investment. However, the use of a floating exchange rate system can lead to the independence of monetary policy in the face of shocks and can be considered as a tool to stabilize the economy in times of business cycles.
2- THEORETICAL FRAMEWORK
The theory of exchange rate overshooting was proposed for the first time by Dornbusch in 1976. If the economy is continuously exposed to unexpected monetary expansion, the exchange rate will exceed its long-term trend in the short term and return to its long-term level in the long term. The overshooting in the exchange rate is a short-term phenomenon that is formed due to the price sticky in the short term and the high adjustment speed in the financial market and the slow adjustment in the real sector of the economy. The dominant core of monetary systems is the use of a "nominal anchor". The nominal anchor is a variable that is used to achieve the goal of monetary policy, and the purpose of its authority is to adjust inflationary expectations and commit the monetary authorities to achieve the declared goals. The innovation of the present study compared to the previous studies is the use of a dynamic approach as well as the examination of the exchange rate jump in the conditions of a stable and floating exchange rate system, which has been less considered in previous studies.
3- METHODOLOGY
The purpose of this paper is to investigate the relationship between monetary policy and exchange rate overshooting in the Iranian economy. In order to test the experimental model of the research, the data of the period 1989-2020 based on the frequency of seasonal data and the generalized moment method (GMM) were used. Based on this, in the form of two stable and floating exchange systems, the rate of jump and deviation in the exchange rate has been calculated by using the Hodrick-Prescott filter and the effect of monetary policy and macro variables on the exchange rate overshooting has been calculated.
4- RESULTS & DISCUSSION
The results showed that the monetary policy leads to an overshooting in the exchange rate and creating a deviation in the exchange rate, and this issue has been more severe in the floating exchange rate system compared to the fixed exchange rate system. Also, the results showed that the production gap had a significant effect on reducing the deviation of the real exchange rate. On the other hand, based on the estimated coefficient, it was observed that the deviation of the inflation rate leads to an increasingly deviation of the real exchange rate.
5- CONCLUSIONS & SUGGESTIONS
Since the relationship between monetary policy and exchange rate is positive, with an expansionary monetary policy, the exchange rate increases, which means the value of the national currency decreases. Therefore, in order to reduce the negative effects of monetary policy on the value of the national currency, it is suggested that appropriate policies and executive tools be designed and implemented by the government so that with proper management, it can be placed on the path of economic activities in the society. There is a need for monetary policy stability, which itself requires the existence of an independent central bank.
Mansour Khalili Araghi; Hossein Abbasinejad; Yazdan Gudarzi Farahani
Abstract
The knowledge about the money demand function and its effecting factors is the most important ubject in Examination of the effects of monetary policies on economiy in order that the monetary policy can help monetary authorites to achive their goals by effecting money demand.
This paper estimates the ...
Read More
The knowledge about the money demand function and its effecting factors is the most important ubject in Examination of the effects of monetary policies on economiy in order that the monetary policy can help monetary authorites to achive their goals by effecting money demand.
This paper estimates the demand of money in Iran over 1350-1390 period using co-integration and error correction methodology.
The analysis shows that narrow definition of money (M1), domestic gross production, real exchange rate, prices level and return rate on long-term deposit are integrated. Thus, using Johansen-Juselius cointegration approach, the long-term demand for money is specified and estimated.
Empirical results show that there are two co-integrated vectors among variables. In this model the coefficient of error correction term is equal to -0.52 which is found statistically significant. This means that 52 percent of error in each period will be corrected in long run trend. Also we find that the income elasticity of demand for money is equal to 1.82 which shows that one percent increase in income, lead to 1.82 percent increase in money demand. The positive income elasticity of demand for money is consistent with related economic theories. Moreover the coefficients of rate of return on long-term deposit and real exchange rate equals -0.82 and -0.34 respectively, which shows that one unit increase in return rate on long-term deposit and one percent increase in real exchange rate, leads to -0.82 unit and -0.34 percent decrease in money demand that show substitution of money in Iran is confirmed. Finaly results showed that money demand function during this period was stable.
