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 ...
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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.
Financial monetary economy
samira motaghi; samane talei; ramezan gholami
Abstract
According to Fisher's theory, an increase in expected inflation results in a unit increase in nominal interest rates, and the real interest rate, which plays a key role in shaping investment and savings behavior, remains constant, and this factor, although inflation Leads to the neutralization of monetary ...
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According to Fisher's theory, an increase in expected inflation results in a unit increase in nominal interest rates, and the real interest rate, which plays a key role in shaping investment and savings behavior, remains constant, and this factor, although inflation Leads to the neutralization of monetary policy;On the other hand, based on the theory of quantity of money and the direct relationship between the velocity of money and the general level of prices, as well as the direct effect of the velocity of money on interest rates, raising interest rates is expected to increase inflation.This effect of interest rates on the inflation index (according to some economists) is not only related to inflation and affects other macroeconomic variables, but the important issue is the type, manner and amount of this effect in the short term and It is a long-term study in the present study using VAR and VECM methods and in the period of 1360 to 1399.The results of the study show the confirmation of Fisher's theory in the Iranian economy both in the short and long term, and suggest that there is a positive and significant relationship between the interest rate variable and the inflation index in the Iranian economy.In addition, variable interest rate fluctuations overshadow other macroeconomic indicators, as this relationship is inverse for the economic growth index and physical investment and direct for the inflation rate index.
Mohsen Niazimohseni; Hamid Shahrestani; Kambiz Hojabr Kiani; Farhad Ghafari
Abstract
Introduction Monetary and financial affiliation, always closely linked to oil sector in Iran (as an oil exporter country) has made Monetary Policy a remarkable challenge to the economic policy- makers. In fact, according to expected statistics, a considerable amount of budget is provided by currency ...
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Introduction Monetary and financial affiliation, always closely linked to oil sector in Iran (as an oil exporter country) has made Monetary Policy a remarkable challenge to the economic policy- makers. In fact, according to expected statistics, a considerable amount of budget is provided by currency sources from oil export and withdrawal from foreign exchange reserve account by which Central Bank inevitably buys currency resulting to increase monetary base. Lack of possibility of mathematical anticipation and uncertainty of oil revenues to finance is one of the challenges monetary authorities encounter in Iran. Accordingly, mathematical programing for economic stability requires identifying the effect of Monetary Policy based on oil revenue. Examination of the effect of Monetary Policy in economics started with the theory of '' the amount of money''. Economic experts are of different viewpoints on the impact of Monetary Policy on Marco variables. According to theoretical and experimental literature, Monetary Policy makes an outstanding difference on Marco variables. On the other hand such policies are extinguished by oil revenue leading to more obscurity. Theoretical framework According to the existing literature, the way of applying Monetary Policy is different in oil exporter and importer countries. when oil price rises, Central bank, In order to control inflation, increases the interest rate, and Monetary Policy acts as a contraction in oil importer countries. However, in oil exporter countries, when oil price rises, currency revenues, mainly in the hands of the government, increases, and the government, by converting part of oil dollars to domestic currency, intentionally or unintentionally, increases the amount of money to provide its expenses. So, in exporter countries like Iran, oil revenues directly affect economic Macro variables. They, also, indirectly affect through Monetary Policy. Methodology The purpose of this study is to examine the effect of monetary policy on economic Marco variables due to oil revenues. This study has, also, used interest rate variable, bank facilities, and legal reserve rate on monetary policy. Such variables have been used, indoors or outdoors, in different economic studies. Basically, in this study, the economic Marco variables are also economic growth and inflation rate respectively due to the limited access to information and also other existing limitations. To measure the economic growth rate, GDP growth rate at a fixed price has been used. The inflation rate resulted from consumer price index growth rate (CPI). In this study, using STATA software, the variables have been used from the years 1978 to 2017. Results & Discussion The results of this study have shown that the rise in bank interest rate has run down the economic growth rate at least up to two years after applying the shock. It drifted towards zero afterwards. With the rise in bank interest rate growth, the cost of financing has been decimated resulting to investment reduction. On the other hand, with the rise in bank interest rate, the inflation rate has been reduced. It is obvious shock standard deviation in bank facilities interest rate has, up to three periods after applying the shock, left positive impact on inflation rate, and the impact has been reduced to zero. Economic growth reveals like bank facilities rate, such a variable has a negative impact on Iran's economic growth. The rise in legal reserve rate has been one period after applying the shock up to zero in the second period. On the other hand, the impact of legal reserve rate has been positive on inflation rate. It has been shown that shock standard deviation reduces inflation rate in legal reserve rate. The rise in oil revenues leads the rise in economic growth rate, thus, reduced to zero up to two periods after applying the shock. With increasing oil revenues, by the government's expenses increase as well. Thus, it leads to the rise in demand, and also, economic growth indoors. Conclusions & Suggestions Based on the results, implementation of monetary policy in Iran has negative effect on economic growth, which is also consistent with the Iran Economy, so policymakers must use another policy for stimulating the economic growth. Put on the agenda.
darioush hassanvand; Younes Nademi
Abstract
Introduction
The relationship between interest rate and inflation has always been one of the most important issues in the monetary economics and determining the nature of this relationship can have significant effects on economic policy making. Therefore, the aim of this paper is to investigate the ...
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Introduction
The relationship between interest rate and inflation has always been one of the most important issues in the monetary economics and determining the nature of this relationship can have significant effects on economic policy making. Therefore, the aim of this paper is to investigate the relationship between interest rate and inflation in Iran. In this research, the accuracy of Fisher effect and its theoretical alternative, the Mundell effect, have been investigated.
Theoretical Framework
In economic literature, there is a positive relationship between the nominal interest rate and expected inflation. This effect, which was introduced by Irving Fisher in 1930, became known as the Fischer effect. According to this theory, an increase in the expected inflation rate will increase the nominal interest rate but the expected real interest rate will remain unchanged.
Mundell (1963) argues that inflation can be continuously lower than real interest rates. In this case, wealth holders redistribute their portfolio and save less money and more interest-bearing assets. Also, by accepting the assumption that consumption is a function of the interest rate, people will reduce their consumption. Simply, an increase in money growth leads to an increase in inflation, and an increase in inflation increases the cost of money opportunity. As a result, it decreases the real balance of money and increases the demand for interest-bearing assets. Because money is a part of wealth, wealth also will be decreased, and reducing wealth reduces consumption and increases savings.
Methodology
In this study, Time Varying Parameters method has been applied. The reason of using TVP approach is that this method incorporates Lucas critique in estimation of parameters and as a result, it can decrease the biased estimations. Therefore, by designing a state-space model for nexus interest rate and inflation, this relationship has been estimated by the Kalman filter method during the period of 1973-2015. For ensuring the robustness of results, two different dependent variables have been applied one of which is the mean of one to five years’ interest rates and the other one is the rate of return of housing sector.
Results and Discussion
The estimation results indicate that random variable parameters of the inflation in the Fisher equation from the 1970s to the late 1980s and early 1990s have been ascending and upward, with the coefficient from about 0.02 in 1991 to about 0.28 in the year 2011. Thus, an increase has been seen in the weight of the inflation factor over the past two decades in determining the banks' interest rate by the monetary authorities of the country. However, in this direction between 2005 and 2007, the rising trend of inflation in determining the rate of interest on bank services had a downward and reversal trend. This was due to the new government's implementation and the determination of bank profits regardless of inflation, but from 2008 to 2011, the inflation rate has been decisive in determining the bank's interest rate. In the year 2012, the trend was also lower due to the start of banking and oil sanctions, which led to a high inflation away from the nominal rate of bank profits. But in the years 2012 to 2015, the upward trend in the inflation rate has been increasing in determining the rate of interest on the bank with a growing trend. It is one of the reasons the new government used to determine the rate of interest based on inflation rate in 2013. The results also show that in the 1970s, the process of determining inflation in the rate of interest on bankrolls has become increasingly rooted in the trend, which has been decreasing since the beginning of the 1980s and during the years 2001-2004. Furthermore, the rate of return of housing, rather than the nominal rate of bank earnings, shows the coefficient of inflation in determining the rate of return of housing has been upward.
Conclusions and Suggestions
Therefore, in total, it can be said that Mundell's relationship has been established in Iran. Of course, it is necessary to note that this relationship has gone up and, in the long run, the relationship has been tightened and moved towards the Fisher relationship in which the money is neutral. This pattern shows that economic activists are gradually paying more attention to real interest rates. However, in the way that has been investigated, the money has not been neutral, and changes in inflation have led to changes in the real interest rate. The consistency of this relationship with Mundell's vision means that the increase in the expected inflation rate will reduce the real money back, and, as a result, wealth will be decreased. Decrease in wealth reduces consumption and increases savings, which indicates that a unit of increase in expected inflation will reduce real interest rates and the effect of expected inflation on nominal interest rates will be less than one, thus, monetary policy changes are not neutral and effective on real variables.
Alireza Kazerooni; Hossein Asgharpuor; maryam nafisi moghadam
Abstract
Introduction
In investigating effectiveness of monetary policy on the economic stability and control of inflation, the relationship between inflation and real variables is highly important. The Philips curve is one of the most popular relationships in macroeconomic which considers the linkage between ...
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Introduction
In investigating effectiveness of monetary policy on the economic stability and control of inflation, the relationship between inflation and real variables is highly important. The Philips curve is one of the most popular relationships in macroeconomic which considers the linkage between inflation and unemployment. It was suggested by Phillips (1958) and expanded by Friedman (1968), Phelps (1968), and Lucas (1973). In the 1990s, New Keynesian Philips Curve was formulated based on nominal rigidity and rational expansions and was widely used in structural models of inflation dynamics and analysis of monetary policy. Despite having a conmonly accepted theoretical background, there have been contradictory results regarding its empirical validity.
High inflation rate has been adversely affected, so it is important to investigate the main determinants of inflation. There are some studies that have investigated dynamics of inflation in Iran. Among them, some have examined the NKPC or hybrid NKPC in Iran. However, these researchers have ignored the utilization of quantile regression method. Quantile regression, proposed by Koenker and Bassett (1978), is an effective tool to overcome the weaknesses in mean regression. In comparison with traditional approaches to estimate HNKPC, quantile regression has two advantages. Firstly, the effects of symmetry and asymmetry of the Phillips curve are studied across quantiles. For example, the effects of explanatory variables may be the different between upper and lower quantiles, which is so important for dynamic monetary policy in different economic circumstances. Secondly, the quantile regression can provide more information than the conditional mean of inflation. Hence, it seems to be able to define the effect of explanatory variables on inflation across quantiles considering the circumstances of frequent inflation in Iran.
Methodology
The relationship between inflation rate and the economic activity such as the output gap described by a Phillips curve. The most commonly used model Philps curve in macroeconomics is the Hybrid New Keynesian Philips Curve(HNKPC) as developed by Garli ande Gertler(1999) The HNKPC is generally used to investigate the effect of looking forward and looking backward components, which can be expressed as:
(1) π_t=γ_f E_t π_(t+1)+γ_b π_(t-1)+χGAP+ϵ_t
Where π_t is the rate of inflation, π_(t+1) is expected inflation for t+1 at time t, GAP is output gap (i.e., a proxy for marginal cost of production) Whereas Iran is a small country and has open economy, exchange rate also has an impact on inflation rate, so we used the change of the exchange rate on Eq.1. In recent years, quantile regression has been used to estimate Philips Curve (e.g., Boz, 2013; Chorteas, Magonis and Panagiotidis, 2012; Xu, Niu, Jiang, and Huang, 2015).
In recent years, quantile regression has been widely used in many important areas such as economic analysis, financial risk management, and environment modeling (Xu, 2015). Estimation methods of conditional quantile functions were discussed in Koenker and Bassett (1978), where a simple asymmetric version of the sum of absolute errors was minimized.
(2) min_(βϵR^k ) [∑_(i∈{i:y_i≥x_i β})▒τ|y_i-x ́_i β_i | +∑_(i∈{i:y_i
