Monetary economy
Mohammad Mahdi Asgari Dehabadi; Ali Nassiri Aghdam; Hossein Doroodian; Parisa Mohajeri
Abstract
Iran’s economy has encountered significant challenges in recent years, with the government debt to contractors emerging as one of the most urgent issues. This situation has negatively impacted Iran’s monetary and banking system, leading to several adverse consequences such as increased funding ...
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Iran’s economy has encountered significant challenges in recent years, with the government debt to contractors emerging as one of the most urgent issues. This situation has negatively impacted Iran’s monetary and banking system, leading to several adverse consequences such as increased funding costs for banks, higher loan interest rates, excessive money supply, and a reduced capacity for banks to provide loans. A proposed solution is based on credit easing and endogenous money, which involves settling the government debt to contractors by making adjustments on the asset side of the Central Bank’s balance sheet. However, the practical implementation of this policy depends on the use of Central Bank resources, which raises concerns about a sudden increase in the money supply and potential negative effects on other economic variables, especially inflation. This uncertainty has led to doubts about the feasibility of such a strategy. The present research aimed to examine the fundamental principles and prerequisites for adopting a credit easing policy in Iran. The study also used stock-flow consistent models to evaluate the potential outcomes of implementation of the policy. The findings indicate that settling the government debt to banks by using the Central Bank resources results in an expansion of the monetary base and money supply, an increase in real GDP, and a reduction in both inflation and interest rates compared to the baseline scenario.1.IntroductionIran’s economy has been facing various problems in recent years. One significant issue is the government debt to contractors, which has adversely affected Iran’s economy, particularly the monetary and banking system. The government’s failure to settle its debts with contractors results in contractors being unable to repay loans taken from banks, leading to an increase in the banks’ non-performing loans. This predicament has precipitated several adverse consequences, including higher funding costs for banks, increased interest rates on loans, an uncontrolled surge in the money supply, and a diminished capacity for banks to provide loans. To address this challenge, some economists, emphasizing endogenous money, look to the quantitative policies applied by central banks in advanced countries like Japan and the United States. They have proposed a solution grounded in credit easing, which involves settling the government debt to contractors by making adjustments on the asset side of the Central Bank’s balance sheet.2.Materials and MethodsIn this method, the government issues bonds to settle its debt with contractors and provides these bonds to the contractors. The Central Bank then purchases these bonds by increasing the bank’s reserves. Since the Central Bank does not directly transact with individuals, it uses commercial banks as intermediaries to facilitate the payments. Consequently, the money supply and the monetary base increase immediately. However, if the contractors owe money to the banks, according to the law of reflux, the newly created money will quickly disappear. This method is largely similar to the second type of treasury bonds used by the Iranian government in recent years. Implementing this policy can reduce non-performing loans, curb the growth of the money supply, and prevent the recognition of illusory profits. It can also lower the level of overdue loans and improve banks’ balance sheets. Additionally, it can reduce the banks’ debt to the Central Bank, thereby lowering the cost of money and reducing loan interest rates. Moreover, the reduction in interest rates can lead to increased loan demand and, consequently, future growth in the money supply.It should be noted that this policy leads to a change in the composition of the Central Bank’s assets, but it does not necessarily result in the growth of monetary base and money supply. However, since the policy relies on the use of Central Bank resources, concerns about a sharp increase in the money supply and potential adverse effects on macroeconomic variables, such as inflation, have always hindered its adoption. The present study used Stock-Flow Consistent (SFC) models to evaluate the effects of these policies on Iran’s macroeconomy. Having gained prominence since the 2007–2008 financial crisis, SFC models aim to integrate the real and financial sectors of the economy within a single framework. They help predict endogenous crises in the economy and enable modeling of the economy based on endogenous money. Therefore, SFC models were used to determine the effects of policies similar to credit easing to settle the government debt with contractors. The focus is on various economic variables, including the monetary base, money supply, and banks’ balance sheets in the monetary sector, as well as real GDP, economic growth, real consumption, inflation, and interest rates in the real sector of the economy.3.Results and DiscussionThe results indicate that settling the government debt to banks by using the Central Bank resources leads to an expansion in the monetary base and money supply, as well as an increase in real GDP and real consumption compared to the baseline scenario. However, the effect of this policy on economic growth completely dissipates after eight periods following its implementation, with the growth rate difference eventually tending towards zero. The graph below illustrates the difference in economic growth between the baseline scenario and the scenario where the government debt to contractors is settled using the Central Bank resources. Figure 1. Difference in Economic Growth: The Baseline Scenario and the Government Debt Settlement Scenario Source: The research analysisAccording to the model’s results, implementing this policy leads to a long-term decrease in inflation by 0.23 percentage points.Figure 2. Difference in Inflation: The Baseline Scenario and the Government Debt Settlement Scenario Source: The research estimationsAdditionally, the results indicate that the policy can lead to a 0.53 percentage point decrease in the interest rate. Figure 3. Difference in the Interest Rate: The Baseline Scenario and the Government Debt Settlement Scenario Source: The research estimations4.ConclusionThe model’s results indicated that the policy, despite increasing the money supply compared to the base scenario, leads to improved economic growth, reduced inflation and interest rates, enhanced bank balance sheets, and increased household welfare (via higher real consumption) compared to the baseline scenario.However, the method is recommended only to address the current problem in the present situation. The research results showed that the proposed policies guide the economy onto a better path than its current trajectory, but they are not a prescription for the government’s indiscriminate use of the monetary base. To improve conditions in the long term, the government needs a program to control its budget deficit and stop borrowing from banks and the Central Bank. According to the findings, borrowing from the Central Bank to settle outstanding debts with contractors is preferable to leaving these debts unpaid. However, the optimal approach is for the government to avoid needing to borrow from the Central Bank altogether.
Public sector economics
Ali Nassiri Aghdam
Abstract
The paper aims to reassess “the Coase Theorem” in its historical context and highlight the discernible gap between the Coase Theorem and the often-overlooked arguments articulated by Coase. In “the Problem of Social Costs”, Ronald Coase intended to emphasis on the irrelevance ...
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The paper aims to reassess “the Coase Theorem” in its historical context and highlight the discernible gap between the Coase Theorem and the often-overlooked arguments articulated by Coase. In “the Problem of Social Costs”, Ronald Coase intended to emphasis on the irrelevance of Pigou's argument in dealing with externalities. The theorem implies that in a world with zero-transaction cost, external effects are internalized without government intervention and the allocation of legal rights does not matter. These implications have led observers to criticize the theorem, notwithstanding the accurate scrutiny reveals that almost all of the critiques center around the main assumption of the theorem – namely, zero transaction costs- rather than the theorem itself. While the correctness of the theorem heavily depends on the concept of “transaction costs”, the concept suffers from a lack of clear definition. It is important to note, in that paper, Coase intended to argue that Pigou's analysis in “the Economics of Welfare” is irrelevant, and in a zero-transaction cost world, market forces internalize externalities, and government intervention is not needed. In contrast, when positive transaction cost is considered the allocation of legal rights and liabilities becomes important. This latter point has been almost ignored in the literature and entailed that the Coase theorem is an unrealistic one. IntroductionCoase Theorem stands as a highly discussed and well-developed theorem in law and economics. The theorem received too much of critiques even before the publication of the Coase’s seminal paper. These hot debates made “the Problem of Social Costs” one of the most cited articles in Law and Economics. In this paper I am going to reconsider the theorem in its historical context and highlight the discernible gap between the Coase Theorem and the often-overlooked arguments articulated by Coase in the aforementioned article.Methods and MaterialTo conduct the research, I adopted the library and document research method. To do so, I thoroughly reviewed Coase’s methodological background and highlighted his consequentialist mind as well as his approach to externalities and rejection of Pigouvian liability and taxation rules. Furthermore, I analyzed critiques of the Coase Theorem and discussed why the theorem has remained robust against those attacks. Finally, I argued why the Coase theorem is a misunderstanding of Coase’s approach to real economy and should be interpreted as the departure point of his theoretical approach to real economy.Results and DiscussionAnalyzing nuisance and externalities, respectively in legal and economic literature was at the core of the Coase’s discussion in “the Problem of Social Costs”. At the time, the dominant legal approach to delineate liability was fault based. The Pigouvian solution to internalize externalities had been developed based on this legal tradition. Based on Pigou, taxes have to be employed to motivate polluters or injurers to take into account the costs they impose on others without compensating them.Coase, first of all, intended to undermine these legal and economic approaches to liability and nuisance. He developed, in that paper, his consequentialist approach to law, based on which alternative liability rules should be assessed in terms of their consequences, and the adopted rule should entail higher total net benefit. This was evident in his opening discussion in which he mentions the case of Sturges vs. Bridgman.In addition, he highlights the role of property rights in performing economies as well as the power of markets in exchanging legal rights and allocating them to the parties who value the rights higher than other parties. He made this clear when he assigned legal rights to farmer and herder alternatively and concluded that the resulting property right is efficient and invariant, regardless of the initial holder of the legal right. This argument named by George Stigler, The Coase Theorem.In this approach, not only markets are considered as a mechanism which is capable to allocate rights efficiently but also what are exchanged in markets are considered as bundles of rights rather than mere physical goods and services. He emphasized on this critical point at the concluding part of the paper.Among these and other exciting issues, what absorbed most attentions was the Coase Theorem and even most of the critics allocated their time and effort to undermine the Theorem, while the Theorem was only the departure point of his arguments. In the first half of the paper, maybe under the influence of the Black Stone Avenue’s discussions, he considered the case in which costs of using price mechanism is zero and argued that in such a world, market exchanges would internalize externalities, government intervention is not required, Pigouvian taxes are irrelevant, and the allocation of legal rights does not matter.In this paper, I discussed alternative critiques of the Coase Theorem and indicated that almost all of them, in fact, argue that in a non-zero transaction costs world the theorem does not hold. This is why these critiques are, in effect, the proof of the theorem rather than its refutation. As a matter of fact, the Coase Theorem is a development of the first fundamental theorem of welfare economics, and both of them are valid in a zero transaction costs world.ConclusionAs indicated, Coase’s main argument is different from the Coase Theorem. While the latter underscores the irrelevance of legal rules, the former highlights the importance of legal rules in real world, in which transaction costs are positive. In this world, reducing transaction costs by defining legal rights is efficiency enhancing (normative Coase Theorem). Furthermore, Legal rights should be chosen based on their merits in economizing exchanges and supporting arrangements with higher total net benefits. This is the main mission of the law and economics.
Economic Development
Hossein Rajabpour; Farshad Momeni; Ali Nasiri Aghdam
Abstract
This article considers the effect of fiscal policy on inclusive development. Inclusive development is one of the concepts that has been introduced in the development economics literature in the last decade and especially with emphasis on the social and political aspects of development, the distribution ...
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This article considers the effect of fiscal policy on inclusive development. Inclusive development is one of the concepts that has been introduced in the development economics literature in the last decade and especially with emphasis on the social and political aspects of development, the distribution of development achievements among different sections of society is in focus. Since fiscal policies are one of the main instruments of the government to eliminate deprivation and imbalances, it is important to understand the effectiveness of these policies in this regard. In this study, the components of fiscal policy include the combination of expenditures and revenues and its effect on inclusive development in the period 1981-2018 in the form of two models of structural vector auto-regression has been studied. Findings show that most components of government fiscal policy except economic expenditures do not have a significant effect on the index of inclusive development and these economic expenditures have a negative impact on inclusive development. The results show that the government's fiscal policies have failed to achieve or accelerate inclusive development, and despite its legal mission, the government has not been successful in comprehensive expanding welfare and extending it to all social groups. Historical analysis also shows that since the beginning of the 2010s and with the intensification of sanctions and currency fluctuations, the relationship between fiscal policy and the index of inclusive development has been weakened. It seems that the reform of the budgeting process and the simultaneous attention to the two constraints of equality and sustainability in growth and development targeting for fiscal policy on inclusive development is essential.
