Financial monetary economy
Yaser Moomivand; seyyd mohammadbagher najafi; Kaveh Derakhshani Darabi; jamal fathollahi
Abstract
Monetary policies are one of the most important policy tools for improving economicvariables, including inflation and production. Monetary policy is currently a dynamic andchallenging field of economic sciences, theoretically and empirically. The views on the effectof monetary policy on production vary ...
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Monetary policies are one of the most important policy tools for improving economicvariables, including inflation and production. Monetary policy is currently a dynamic andchallenging field of economic sciences, theoretically and empirically. The views on the effectof monetary policy on production vary from the ineffectiveness and neutrality of money inthe short and long term to the effectiveness of monetary policy and its effect on production inthe long term and even in the short term.2. Review of the literatureInstitutional aspects and their effect on economic variables and the economic performance ofdifferent societies have been attracted by experts in the field since the 1980s and led to thedevelopment and expansion of its literature in the 1990s. Moreover, the valuable works ofNorth and Coase, as well as, winning the Nobel Prize in Economic Sciences for their effortsto introduce institutional analyses put forward institutionalism as one of the leading economictheories. According to this literature, it can be stated that the same impulses and policies canbe followed by different reactions due to temporal and spatial differences in the institutionalenvironment in which they happened (Dehghan Monshadi, 2019).2.1. The effect of governance on the effectiveness of policiesThe new economic literature emphasizes the importance of institutions and governanceconditions in the economic development process and the performance of economic policies.Governance has a long history and has been defined in different ways. It literally meansdomination, ruling, and strategic government, but it means the activity of countrymanagement and control of a company or organization in the Oxford English Dictionary(Gholipoor, 2004).3. Materials and methodsThis research investigated the effect of variables on the effectiveness of monetary policyusing the model introduced by De Mendonça and Nascimento (2018), which is presented asRelation (1).(1)where is the index obtained for the effectiveness of the monetary policy in the i th country inthe t th year, GGI is the index of good governance, and X is other economic variables affectingthe effectiveness of the monetary policy, such as the degree of openness of the economy, thedevelopment of financial markets, and virtual variable of the existence of the inflationtargeting policy in the relevant country. In the years with the inflation targeting policy, thevalue was set to 1, but it was 0 in other years. In addition, the GDP variable was included inthe model to include other variables affecting the effectiveness of monetary policy.4. ResultsThe effectiveness index of monetary policy was calculated for the sample countries beforeestimating the coefficients using the proposed approach. This research calculated theeffectiveness of monetary policy using the approach introduced by Krause and Rioja (2006).In this approach, and were calculated for the selected countries in each year. The inflationdeviation was measured by the deviation of the consumer price index. Analysis of thedescriptive statistics for the research variables demonstrated that this index average for thecountries in the period under study was 2980.43 and the median equaled 1.48. It should benoted that the lower the value of the index, the more effective the policy would be in thereduction of inflation and production fluctuations. The highest and lowest index value was873575.4 and -107.91, respectively. Jarque- Bera statistic and its significance level alsoshowed that the distribution of the variable is not normal.5. ConclusionAs shown by the results of earlier studies and the present research, the process of selection,decision-making, and performance of individuals and societies takes place within theframework of institutions. Thus, their reaction to various phenomena, including economicand monetary policies, depends on institutions. One of the major institutions is thegovernance that affects economic variables with monetary and financial policies. Therefore,the primary objective of this research was to determine the effect of governance quality onthe effectiveness of monetary policy. According to the results, improving the quality ofgovernance significantly reduced production and inflation fluctuations and enhanced theeffectiveness of monetary policy. Hence, it could be concluded that in societies withfavorable governance indicators, better and more complete implementation of laws andregulations could be expected, and formal and informal obstacles to implement economicpolicies are reduced. The results obtained from the estimation of coefficients indicated asignificant relationship between the inflation targeting policy and the increased effectivenessof monetary policy. The existence of inflation-targeting policy and its obligation make thecentral bank focus more on the main goals of monetary policy, which is to maintain the valueof the national currency and increase economic stability. Under such circumstances, thepolicy-maker can have more authority in controlling inflation and production fluctuationsrather than other secondary goals, resulting in more success in controlling inflation andproduction fluctuations.
