Monetary economy
Mohammad Mahdi Asgari Dehabadi; Ali Nassiri Aghdam; Hossein Doroodian; Parisa Mohajeri
Abstract
Iran's economy has faced many problems in recent years. the government's indebtedness to contractors stands as one of Iran's most pressing issues which has had bad effects on the monetary and banking system of Iran. This predicament has precipitated several adverse consequences, including the cost of ...
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Iran's economy has faced many problems in recent years. the government's indebtedness to contractors stands as one of Iran's most pressing issues which has had bad effects on the monetary and banking system of Iran. This predicament has precipitated several adverse consequences, including the cost of funds for banks, elevated interest rates on loans, an unrestrained surge in the money supply, and a diminishing capacity for banks to extend loans. To tackle this challenge, some economists with emphasis on endogenous nature of money, propose a remedy grounded in credit easing. this approach entails settling the government's debt to contractors by effecting adjustments on the asset side of the Central Bank's balance sheet. However, the practical execution of this policy hinges on the utilization of Central Bank resources, raising concerns about a sudden surge in money supply and potential adverse impacts on other economic variables, notably inflation. This has cast doubt on the feasibility of implementing such a strategy. In this research, we delved into the fundamental principles and prerequisites of adopting the credit easing policy in Iran. To evaluate the potential outcomes of implementing this policy, we employ the stock flow consistent model. Our findings reveal that settling the government's debt to banks through the utilization of Central Bank resources leads to an expansion in the monetary base and money supply, an upswing in real GDP, and a decrease in both inflation and interest rates when juxtaposed with the baseline scenario.
