Oil price cycles, fiscal dominance and countercyclical monetary policy in Iran

Abstract

The mission of monetary policy is to conduct countercyclical policy, however, this is not a universally practiced norm. Pro‐cyclical fiscal and monetary policies during boom periods have often been observed in developing countries and tend to amplify the impact of positive commodity price shocks. The consequence is strengthening of domestic inflationary pressures and appreciation of the exchange rate. This paper examines counter‐cyclicality of monetary policy and the role of fiscal policy in this regard. The stance of fiscal policy and the manner of financing government expenditures have a significant effect on the conduct of monetary policy. Our empirical observations indicate that, fiscal and monetary policies in Iran are generally expansionary, particularly during economic booms, often resulting in subsequent large depreciation of the domestic currency followed by higher inflation rates and economic slowdown. Under fiscal dominance, monetary policy is ineffective and both targets and instruments of monetary policy will not be under the control of the central bank. A structurally balanced fiscal rule that maintains an aligned exchange rate allows effective countercyclical monetary policies and discourages excessive foreign financing. Moreover, policy measures that increase more reliance on domestic resources are the appropriate policy measures that makes the economy more resistant to external shocks.

The Costs of Using Volunteers in a COVID-19 pandemic Response Program in Iran

“…Another study in Iran found that using the volunteer force for the Iranian government saved more than $ 4 per dollar 30 . The reason for the decrease in this rate in recent years is the devaluation of Iran's currency and the consequent rise in prices for various services such as food and transportation 31 . On the other hand, wages in Iran have not increased in proportion to the devaluation of the currency 32 .…”

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“…Other studies highlight the importance of fiscal deficit and institutional arrangements that adversely affect central bank's independence (e.g. Alavirad and Athawale, 2005;Kia, 2006;Samimi and Jamshidbaygi, 2011;Naini and Naderian, 2019;Mazarei, 2020). The potential impact of sanctions on Iran's macroeconomic condition is also a unique factor (Kandil and Mirzaie, 2021); their effects on inflation are explored in several studies.…”

“…Other studies highlight the importance of fiscal deficit and institutional arrangements that adversely affect central bank's independence (e.g. Alavirad and Athawale, 2005; Kia, 2006; Samimi and Jamshidbaygi, 2011; Naini and Naderian, 2019; Mazarei, 2020).…”

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