Macroeconomics
Sohail Rudari; Seyyed Hadi Arabi; Sanaz Rahimi Kahkashi
Abstract
The present study aimed to examine the transfer, reception, and the spillover of volatility from March 1982 to September 2022, using the time-varying parameter vector autoregression model based on Barunik-Krehlik (TV-VAR-BK) with monthly frequency. The results indicated that the primary relationship ...
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The present study aimed to examine the transfer, reception, and the spillover of volatility from March 1982 to September 2022, using the time-varying parameter vector autoregression model based on Barunik-Krehlik (TV-VAR-BK) with monthly frequency. The results indicated that the primary relationship among the volatility of the analyzed variables is of long-term nature, with the exchange rate emerging as the dominant factor in explaining the volatility of the examined network. In the short term, liquidity serves as the primary transmitter of volatility to inflation and the exchange rate. However, in the medium and long term, the exchange rate becomes the primary transmitter of volatility to inflation, while liquidity acts as the net receiver of currency volatility. Additionally, the long-term impact of the exchange rate is more pronounced. Failure to control currency volatility can lead to inflation turbulence by transferring volatility to liquidity, underscoring the significance of exchange rate stability in managing liquidity and inflation.IntroductionThe exchange rate is one of the key factors influencing inflation. In addressing the impact of exchange rate volatility, the status of inflation plays a crucial role (Tahsili, 2022). Moreover, assessing the factors influencing the exchange rate stands as one of the most challenging empirical problems in macroeconomics (Williamson, 1994). Since the exchange rate is significant economic indicator in any country, alterations in monetary variables (e.g., liquidity and inflation rates) as well as non-monetary variables can lead to fluctuations and instability in the exchange rate (Amrollahi et al., 2021). The causality of volatility between money and inflation can vary depending on economic conditions (Al-Tajaee, 2019). A deeper understanding of liquidity growth dynamics, inflation, and exchange rates in Iran elucidates the reasons behind high inflation, rapid and continuous liquidity growth, and the impact of exchange rate volatility. Extreme changes in each variable overshadow the others, indicating a complex relationship among exchange rates, inflation, and liquidity. Examining the relationship between the volatility of different assets unveils the phenomenon of volatility spillover, where fluctuations in one component trigger volatility in others. An additional crucial aspect is understanding the modes of transmission, reception, and intensity of the causal relationship among exchange rates, inflation, and liquidity in Iran during different periods. In different years, the mutual influence of these components may have varied based on political, economic conditions, health, and pandemic issues, each of which impacting decision-making concerning exchange rates, inflation, and liquidity as three vital macro-economic components. In this respect, the present study used the time-varying parameter vector autoregression model based on Barunik-Krehlik (TV-VAR-BK) with monthly frequency in order to examine volatility spillover from March 1982 to September 2022 in Iran, providing a new perspective on investigating causality by analyzing the time-frequency volatility among exchange rates, inflation, and liquidity.Materials and MethodsThis study is applied and analytical in terms of its purpose and research method, respectively. The data was sourced from the Economic Accounts Department and the National Accounts of the Central Bank. The TVP-VAR-BK model was employed to analyze the time series among exchange rates, inflation, and liquidity. The TVP-VAR-BK model helped analyze the transmission and reception of volatility of variables across different periods (short-term, medium-term, and long-term). Furthermore, the analysis delved into whether the variables acted as net receivers or net transmitters of volatility.Results and DiscussionThe results showed that, in the short term, liquidity exerted the most significant influence and transmitted volatility to other variables. Notably, the most substantial impact and transmission of volatility by the liquidity occurred in 2013, following the tightening of sanctions on Iran. In the medium and long term, the exchange rate emerged as the most influential factor on other research variables.Examining the causal relationship in the short term, a strong causal connection was identified from liquidity volatility to inflation and the exchange rate. However, no causal relationship was observed between inflation and the exchange rate in the short term. Therefore, in the short term, liquidity could be the primary cause of volatility in inflation and the exchange rate. Failure to control short-term liquidity volatility could lead to severe volatility directly and indirectly within the studied network.Moving to the medium term, the transfer of volatility was predominantly from the exchange rate to liquidity and, to a lesser extent, from liquidity to inflation. In the medium term, the transfer of volatility from the exchange rate to inflation was less pronounced. This suggests that fluctuations in the exchange rate strongly transfer volatility to liquidity in the medium term, and liquidity significantly contributes to the emergence of inflation volatility. The exchange rate, albeit to a minor extent, can directly contribute to the transfer of volatility to inflation. This underscores the dominant role of the exchange rate in the network during the medium term.In the long term, no causal relationship between liquidity and inflation was observed, and there was no causality in the transfer of volatility between inflation and the exchange rate. This implies that factors other than the investigated network can explain inflation volatility in the long term. Although there is causality in the transfer of volatility from the exchange rate to liquidity in the short- and medium-term periods, this causality is stronger in the long term. Hence, while the classical view on liquidity and inflation holds until the medium term, the post-Keynesian view becomes evident in the long term. Overall, the exchange rate stands out as the dominant factor in the investigated network. Without stability in the exchange rate, Iran’s economy shall anticipate the fluctuating growth of liquidity and inflation in the short- and medium-term periods.ConclusionThe primary relationship among the volatility of the examined variables proved to be long-term, with the exchange rate emerging as the dominant factor explaining the volatility within the investigated network. In the short term, liquidity functioned as the net transmitter of volatility to inflation and the exchange rate. However, in the medium and long term, the exchange rate takes on the role of the primary transmitter of volatility, while inflation and liquidity assume the positions of net receivers of currency volatility. Moreover, the impact of the exchange rate was found to be notably stronger. Should exchange rate volatility remain uncontrolled, it has the potential to induce inflation volatility by transferring it to liquidity. This underscores the critical importance of maintaining exchange rate stability for the effective control of liquidity and inflation.
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.
Political economy
Behrouz Sadeghi Amroabadi; Ehsan Kazemi
Abstract
Improving the quality of institutions with development of the country's economic infrastructure can reduce the degree of fiscal policy cycles in developing countries. Therefore, the purpose of this study is to analyze the effects of good governance and political cycles on the liquidity and budget deficit ...
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Improving the quality of institutions with development of the country's economic infrastructure can reduce the degree of fiscal policy cycles in developing countries. Therefore, the purpose of this study is to analyze the effects of good governance and political cycles on the liquidity and budget deficit changes during 1978-2018. The research method is descriptive analytical by using econometric method of the GMM. Data are from the Central Bank of Iran and World Bank site for Iranian Economy. The research results show the effect of good governance on the variables of liquidity and budget deficit changes are negative and significant. Also the interactive effects of good governance and the election dummy variables on the liquidity and budget deficit changes are negative and significant. These results indicate that good governance during the elections can control the budget deficit and liquidity changes, hence to control the business-political cycles, suggest to improve the good governance in Iran.
Mehdi Hajamini
Abstract
During the period 1969-2017, Iranian economy’s inflation rate was on average 19 percent which did not have a downward trend; hence the name chronic moderate inflation. In the present paper, by reviewing 110 theoretical and empirical studies and 83 studies on the Iran’s economy, a meta-analysis ...
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During the period 1969-2017, Iranian economy’s inflation rate was on average 19 percent which did not have a downward trend; hence the name chronic moderate inflation. In the present paper, by reviewing 110 theoretical and empirical studies and 83 studies on the Iran’s economy, a meta-analysis on the role of budget structure for explaining the persistence of the chronic moderate inflation rate of Iran is presented. This analysis shows that the budget structure (deficit, operating deficit, capital surplus, and financing) has been the driving force behind the continual increase in the liquidity as well as the permanent repression of interest rates in the post-revolutionary period. Therefore, change in financial and monetary strategies (and not policies necessarily) is a precondition to control the liquidity and inflation. Accordingly, some budgetary rules are needed to improve the process of decision-making and parliament-government-central bank interactions. In addition, a clear consensus has been reached about the inflationary effects of government budgets in the Iranian economy, so it is recommended that future researches focus on how the new rules can affect interaction between the fiscal and monetary autorities using game theory.
Reza Nasr Esfahani; Kazem Yavari
Volume 5, Issue 16 , October 2003, , Pages 69-99
Abstract
The purpose of this study is to analyze the effects of real and nominal variables in inflation by using a Vector Autoregressive Model (VAR). This model used liquidity growth، exchange rates growth، inflation rate، expected inflation as nominal variable and real output gap as real variable by employing ...
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The purpose of this study is to analyze the effects of real and nominal variables in inflation by using a Vector Autoregressive Model (VAR). This model used liquidity growth، exchange rates growth، inflation rate، expected inflation as nominal variable and real output gap as real variable by employing seasonal data. The results show that the cause of inflation is not just the liquidity growth، the chronic inflation is also related to real variables. The VAR results show that in the short-run، nominal variables such as liquidity growth، and exchange rates do affect inflation rate. In the long run، however، stability of prices depends not only on monetary growth but also on the expected inflation and real output gap. The empirical results indicate that liquidity growth is endogenous and nominal variables are related to real output gap. The paper concludes that it is not enough to rely just on monetary policy to control prices in the Iranian economy and in the long run، real output gap should be reduced.
