Monetary economy
Abbas Shakeri; Elnaz Bagherpour Oskouie
Abstract
High and continuous inflation in Iran's economy as a structural dilemma has adverse economic, political, and cultural outcomes, and to control the inflation, policymakers should employ appropriate and well-timed policies concuring to the economic structures of the country. Hence, this study points to ...
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High and continuous inflation in Iran's economy as a structural dilemma has adverse economic, political, and cultural outcomes, and to control the inflation, policymakers should employ appropriate and well-timed policies concuring to the economic structures of the country. Hence, this study points to distinguish and analyze the nature of inflation. For this reason, the present study examines the dynamics of the causal relationship between inflation and liquidity as well as the relationship between inflation and exchange rate by applying the continuous wavelet transform approach using monthly data during the years 1982 to 2021 in Iran’s economy. The results indicate: 1. Liquidity does not infulence the inflation rate in the long term and there is a reverse causality (causality from inflation to liquidity) and this result affirms the endogeneity of liquidity in the long term in Iran's economy. 2. The exchange rate growth shocks (from the supply side of the economy) affect inflation, in a way that the exchange rate altogether influences the inflation in both the short and long term.1.IntroductionAmid the last few decades, high and steady inflation has been a serious economic problem in Iran's economy. Empirical evidence suggests that in the years 1995, 1996, 2013, 2014, 2019, and 2020-21, Iran's economy has suffered from heavy and sequentional inflations. However, the perseverance of high inflation, especially since 2020, has turned into a fundamental problem. The main issue about the inflation in our country is not the inflation per se, but the critical status of it has faced development plans with great challenges for many years. Then again during the last decade, the economy tried to control inflation by restricting the growth of the money supply. But it appears that the results come to oppose established recommendations to curb the growth of liquidity. Therefore, the question raised in the present study is whether the high inflation rate in Iran's economy is due to the rise of the money supply.Although the relationship between inflation and liquidity in the economy has been examined in several studies, the significance of inflation and its relation with macroeconomic variables- the broad previous and subsequent link with other variables- exaggerates the study of the relationships among these variables and other macroeconomic variables in different time scales. In this regard, the present study examines the relationship among some key monetary and price variables in the economy (dynamics of the relationship between inflation and liquidity as well as inflation and exchange rate).2.Methodology and MethodsThere are several methods to examine the interrelationships of inflation, exchange rate, and liquidity that are commonly divided into the form of statistical methods as well as model-based methods. But, since the causal relationship between these variables is likely to change over time, so further exploration of those relationships requires techniques that consider the relationship between two variables over time and different time horizons (different friquencies). Unlike most statistical and econometric techniques, the wavelet approach does not require variables to be survivable, nor does it assume linear relationships between them. In contrast to time series techniques, the use of wavelet approaches, especially wavelet coherence and continuous wavelet transform approaches within the framework of the methodology of econophysics (econophysics), opens new horizons in the study of causality in time series, because it shows the possibility of dynamically examining effects at different frequencies by separating it to the short and long term. To this end, the present study, using the continuous wavelet transform approach, examines the dynamics of the causal relationship between inflation and liquidity and the relationship between inflation and exchange rate by applying monthly data during the years 1982:1 to 2020:12 in Iran’s economy.3. Discussion and ResultsGenerally speaking, based on what we've learned regarding the rooting of inflation in the our economy, it can be said that when the inflation rate increases and reaches a level higher than the average inflation (30 to 40 percent), such as when the average inflation rate shows lower figures, other monetary variables cannot be illustrative. Also, regarding the rooting of inflation, it can be said that in recent years, due to the adjustment policy, decrease of oil exports or sanctions, the demand for foreign currency exceeded its supply, and we witnessed instabilities in the exchange rate. Hence, the instability and fluctuations in the exchange rate and its concerned indicators do not exclusively follow monetary conditions.Therefore, the stability of exchange rates leads to the stability of prices and the limitation of monetary follow ups, and the resulting inflation itself causes more changes in the exchange rate in the next period.4. ConclusionIn the current economic situation, the appreciation of the exchange rate is the cause of inflation and high inflation is to a noteable extent the cause of the budget deficit and liquidity growth. Therefore, another factor is the supply side that causes inflation and is not a monetary factor. Therefore, in a situation where the endogenous creative forces of liquidity are active, relying on controlling the amount of money and liquidity as the goal of monetary policy and a solution to curb inflation will not work and will pave the way for speculators and unproductive agents. Therefore, in order to achieve the price stability, it is recommended that the monetary policy maker should a) avoid instant changes in relative and key prices (the most important of which is the exchange rate) and b) control the bank interest rate along with the structural reforms of the banking system in a way that the banking system moves toward optimal allocation of credit resources.
