Monetary policy

The ultimate goal of monetary policy is to achieve price stability and high output. In this regard, central banks usually change the interest rate, liquidity, and money base in order to apply monetary policies. The John B. Taylor rule is one of the rules known in the transmission of monetary policy.^{^[1]} Based on this rule and given the output gap and inflation gap, the central bank increases or decreases the interest rate. Using library references and theoretical foundations, the current paper employed a descriptive-analytical research method to explain the hypothesis stating, “Taylor rule can be used to redefine an optimal monetary rule in the central bank for the mechanism of the stable monetary policy in the framework of Iranian economy and the Interest-Free Banking Act (approved in 1983) to enforce monetary policy and control inflation.” According to the research results and the fact that Taylor rule was successful in some developed and developing countries, it can be redefined in the framework of the Interest-Free Banking Act of Iran. It can also be used as a highly flexible and appropriate monetary rule and a stable model for the mechanism of monetary policy and inflation control.

Inflation targeting framework has become a predominant monetary approach across the globe. Williams (2015) believes that in a very real sense, almost all economies are inflation targeters -either explicit or implicit- now.(1) Due to the increasing spread of this policy, it is necessary to consider the way it affects macroeconomic variables. using prevalent economic models for evaluating the effectiveness of inflation targeting causes bias selection which for solving this problem, it is proposed propensity score matching model. the goal of this paper is to evaluate the effect of the adoption of Inflation Targeting policy on indirect taxes and its components in two selected groups of oil exporter and oil importer countries during 1990-2016 by using propensity score matching model. our results have shown that inflation targeting adoption in average has a positive and significant effect on indirect tax revenues in oil importer countries group but its effect on indirect tax revenues in oil exporter countries is insignificant. JEL Classification: E5, H2, C21.

Assumption of exchange rate overshooting has significant position in international macroeconomic discussion. This phenomenon is one of the abnormal behaviors of exchange rate that happen in short run. Dornbusch (1976) shows that because speed of equilibrium prices is slow relative to asset markets and commodity prices are sticky in the short run, However, over time, commodity prices will rise and result in a decrease in real money supply and thus, in a higher interest rate. This, in turn, will cause the currency to appreciate. The aim of this article is study of exchange rate overshooting for period 1380:1-1387:12 by Vector Error Correction approach. Results show that monetary relative shock in long run and short run also effect exchange rate that imply exchange rate overshooting in Iran.

High degree of interest sensitivity of durable goods is now a stylized fact in the literature of monetary policy. This literature, however, does not provide a clear and consensual explanation for the modalities of this stylized fact. In this paper, two independent empirical models are performed to shed more light on the cross-sectoral impacts of monetary policy. The results of first study indicate that there is no straightforward qualitative relationship between the degree of durability and the interest-sensitivity of durables. While, the second study shows that, in response to monetary policy shocks, productive durables behave differently from consumer durables. For both studies, two models have been estimated using the quarterly data of the U.S. over the period 1954:III – 2007:II JEL Classification: E52, L68.

The primary purpose of this study is twofold: Firstly, using the Markov Regime Switching model throughout December 2008 to February 2020, it investigates and compares the nonlinear impacts of exchange rate movements and monetary policies on Petroleum Stock Index, PSI, in Iran. Accordingly, some control variables, such as OPEC oil price, inflation rate, and international sanctions, have also been used to model these relationships more accurately. Secondly, it is an empirical attempt to trace the historical changes in the PSI behavior through distinguishing the precise regime numbers, and the relationships between the exogenous variables and the PSI. Our results confirm that the effects of both exchange rate movements and monetary policies on the petroleum stock market return are direct and significant. More interestingly, the more we move from regime one to regime three, the greater the effects of the research variables on the index, except for the impact of OPEC oil prices. Our empirical findings further suggest as the effects of sanctions intensify, the influences of monetary policy and exchange rate movements would have a more significant impact on the petroleum stock index returns.

Asset-liability mismatch in balance sheet of banks shows serious challenges in banks because of the traditional methods of recording assets and liabilities at book value in Iran. The Central Bank of the country motivated and advised banks to take concrete steps in minimizing the mismatch in the asset-liability composition. This paper attempts to suggest a micro funded framework that can evaluate the role of asset and liability management in banking sector in business cycles through a DSGE model. In this paper, we use Bayesian method to estimate parameters and use national account and balance sheet data from 1981 to 2013. Results show that tightening monetary policy decreases the cost of ALM .On the other hand, raising required reserve requirement increases the cost of asset and liability management; technology shock leads to decrease of asset and liability management cost, and the costs of ALM affects interest rate. Then, the increase of the cost of ALM leads to increase of interest rate. JEL Classification: E31, O42

Monetary environment as the core of financial system has been functionally designed in light of the new set of extensive goals including financial stability, sustainable noninflationary growth, external sustainability, and price stability. A comprehensive monetary policy framework is proposed for Iran which systematically include the new goals, stance variables, instruments, transmission mechanism as well as timely monitoring system. Accordingly, macroeconomic data provides a reliable momentum to evaluate how far the macroeconomic condition is away from the monetary goals in case the data is timely-consistently compiled by policy makers. A wide variety of policy instruments are occasionally applied in the context of the new monetary policy framework by the conventional transmission channels which are technically tracked via monetary condition index, early warning system, leading indicators, and stress tests that give a timely feedback to policy makers to draw contemporaneously a picture of macro prudential stance. Given the prominent share of asset market (housing and capital) in the whole financial and nonfinancial markets in Iran, the monetary policy is empirically required to streamline assets market’s flow of funds instead of extra concentration on broad money growth and lending channel. Meanwhile, balance sheet channel is obviously expected to be more effective against monetary policy stance rather than lending channel in order to achieve monetary goals. In this regard, housing and capital markets are both significantly considered more efficient to finance flow of funds and fiscal deficit. JEL Classifications: E52, E59, G10

Estimates of instrumental rules can be utilized to describe central bank's behavior and monetary policy stance. In the last decade, considerable attention has been given to time-varying parameter (TVP) specification of monetary policy rules. Constant-parameter reaction functions likely ignore the impact of model uncertainty, shifting preferences and nonlinearities of policymaker's choices. This paper examines the evolution of monetary policy reaction function in Iran via estimating a time-varying parameter (TVP) specification in the 1990:2-2014:4 period. We try to find out whether there is a significant time variation in coefficient of CBI (the Central Bank of Iran) reaction function. The main findings are threefold. First, monetary policy rules changed over time, hence making relevant the application of a time-varying estimation framework. Second, the monetary instrument smoothing parameter is much lower than typically reported by previous time-invariant estimates of policy rules. Third, CBI does not systematically follow instrumental rule to fight inflation. During the whole sample, there is no quarter in which the inflation gap coefficient is negative and significant; therefore, monetary policy has not counteracted inflationary pressures. Key words: Monetary policy, Instrumental rule, monetary policy reaction function, Time varying coefficient, Extended Kalman filter. JEL Classification: E4, E5

This paper examines downward price rigidity in Iranian house market and discusses whether this characteristic would result in an asymmetric relationship between house price and monetary policy. To test the downward house price rigidity the threshold GARCH model is employed. The asymmetric adjustment to monetary policy is examined using the asymmetric cointegration and error correction models. The results indicate the presence of the downward house price rigidity in Iranian house market. Moreover, house price are asymmetrically adjusted to monetary policy such that it is increased to reflect a loose monetary policy whereas displayed a large amount of persistency following a tight monetary policy. The results imply that house price tend to overreact in upturns and underreact in downturns reaffirming the downward house price rigidity in Iran. Hence, the government should consider the asymmetric house price adjustment when implementing relevant policies for the house market to avoid the creation of a bubble or the collapse of the house market.

This paper uses monthly price indices of 448 items of manufacturing sector in 2004:4 to 2016:01, to study the effect of exchange rate and its volatilities on price setting behavior of manufacturing sectors. Given that, many manufacturing sectors in Iran need to import raw materials, intermediate and capital goods in their production process, it is expected that exchange rate variations affect price setting behavior indices (frequency and size of price changes) in various manufacturing sectors. The results show that an increase in the exchange rate and also an increase in the exchange rate volatility lead to an increase in the frequency of price changes. In addition, while the exchange rate, itself, does not affect the size of price changes, the exchange rate volatility negatively affects the size of price changes. That is, manufacturers’ response to the exchange rate increase is limited to an increase in the frequency of price changes, but an increase in the exchange rate volatility increases the frequency of price changes and decreases the size of price changes. Also, the frequency of price changes in manufacturing sectors with high level of competitiveness and low level of raw material inventory is positively affected by the exchange rate increase.

The main objective of this study was to investigate the effect of monetary policy on changes in the price of financial assets (including foreign exchange, gold and stocks) in Iranian economy. In this regard, this paper answers whether monetary policy could lead to regime changes in asset markets. To answer this question, monthly data during the years 1995 to 2017 and a combination of Markov Switching and Probit methods were used. First, using Markov Switching method, each market was divided into two high-volatility and low-volatility regimes with different average returns, and then, by a Probit model, the effect of monetary policy on the probability of markets being exposed to these regimes was studied. The results of this study show that in all three markets, the Markov Switching model offers better fit than the linear model, which indicates the occurrence of regime changes in the markets. The results of the Probit model show that monetary policy in all three markets is effective on their regime changes, and an expansionary monetary policy will strengthen the position of all three markets in the high-volatility regime with a positive average return. Also, inflation is also one of the factors affecting regime changes in all three markets. The market situation in the past period as well as the situation of other markets are among the factors that lead to regime changes in asset markets. The sanctions imposed on Iran's economy in the currency and gold markets are among the factors that have strengthened the likelihood of changing the regime of these two markets to a volatile environment.

The Central Bank has specific regulations, including asset classification guidelines and how to perform loan’s loss provisioning to oversee banks and credit institutions. The Central Bank seeks to improve the quality of the loan and reduce the amount of nonperforming loans by reducing the revenues of the bank or credit institution through imposing fine on balance of each of the categories of non-performing loans. In this study, the effectiveness of this policy has been investigated using the system dynamics method. The results of the research indicate that the application of the above policy would at least lead to a 17% reduction in the amount of non-performing loans’ accumulation. Research suggests that, if the coverage factor of a pledge during the provision of loan, increases the effectiveness of the policy in the fight against the accumulation of non-performing loans will be eliminated. This phenomenon suggests that the Central Bank needs to focus more on preventive regulatory approaches than on a priori methods in monitoring the credit institutions in providing a loan.

Controlling the business cycle and minimizing the inflation gap are considered as two major goals for monetary policy. Hence, the policymaker will be able to make more decisive decisions with an awareness of the dynamic relationship and causal relationship between these two variables. Accordingly, the present study uses a discrete and continuous wavelet transform to provide a new understanding of the relationship between these two variables in Iran's economy during the years 1990:2 – 2017:1. According to the results of the research, in the short-run (less than one year), the causal relationship has been bidirectional and procyclical. In the medium run (1 to 4 years), the causal relationship is countercyclical and from the inflation gap to the business cycle. In the long run (4 to 8 years), the business cycle is leading, and the two variables are in phase. Besides, the relationship between variables is highly unstable over time and depends on different scales. Therefore, inflation in Iran's economy is not merely a monetary phenomenon, and in the medium-term is affected by changes in the real sector. According to the results of the research, for the output and the inflation to be stable, it is recommended that the policymaker take both goals simultaneously.

The recent housing market experience has led many to concern that the developments in the housing sector are not just a passive reflection of macroeconomic activities but instead might be one of the driving forces of them. In this context, it is crucial to understand the nature of the economy by considering the housing market and build a suitable monetary policy. In this paper, using Bayesian methods, we develop and estimate a DSGE model for Iran from 1988q1 to 2017q4, which explicitly models the housing in the banks’ portfolio to study the macroeconomic effects of monetary authority’s reaction to the housing price inflation. Our findings indicate that this reaction amplifies all the implications of the structural shocks.

The national economy of most countries is made up of various regions (provinces) with different industrial composition, financial structure, trade relations, and institutional environment. Depending on these characteristics, regions may respond differently to a uniform national macroeconomic policy. Policymakers should consider these heterogeneities to achieve the national development objective. Using separate VAR models to investigate the regional effects of a uniform policy neglects the spillover effects across regions. The GVAR approach models the links between units (such as regions) using the weighted average of different macroeconomic aggregates. Since Iran is a regionally dispersed country, this motivates us to analyze whether or not a standard monetary policy has different effects on its provinces' unemployment and inflation rates using a GVAR approach during 2005q1-2016q1 period. Results indicate that one standard deviation positive monetary shock at the national level can significantly reduce unemployment in some provinces. These responses are similar in terms of timing, but their intensity is different. Also, this positive shock has a positive effect on inflation in all provinces. All responses are approximately similar in terms of timing. Despite this similarity, shock responses vary in terms of intensity.

One of the striking features of the business cycles is the patterns of co-movement of output, inflation, interest rates, and real equity prices across countries. This paper empirically examines the effects of domestic and foreign monetary policies on Iran's macroeconomic variables (including real production, inflation, short-term interest rate, and real exchange rate) using quarterly data over the 1996Q1-2015Q4 period and a global vector auto-regression model (GVAR) for Iran, the largest trading partners of Iran including China, India, Russia, South Korea, Turkey, the European Union, and the United State. The results of domestic monetary policies on Iran's macroeconomic variables illustrate a form of Price Puzzle on how monetary policy shocks affect inflation in Iran. The effects of the positive shocks of domestic interest rate on real GDP in Iran is negative. Iran's real exchange rate response to the positive shock of domestic interest rates is negative and significant. The results regarding the impact of the foreign monetary policies on Iran's macroeconomic variables illuminate that only the effects of a positive shock to China's interest rate are significant and negative on Iran's inflation. Besides, there is a significant independency of Iran's real GDP to the monetary policy shocks of the other trading partners of Iran. Also, the response of Iran's real exchange rate to positive monetary shocks in the EU and Turkey is at a positive and significant level. The results indicate that due to the closed economic structure of Iran, global economic crises that lead to a recession in other countries have had the least impact on the Iranian economy.

The development of new technologies has confronted the entire domain of science and industry with issues of big data's scalability as well as its integration with the purpose of forecasting analytics in its life cycle. In predictive analytics, the forecast of near-future and recent past - or in other words, the now-casting - is the continuous study of real-time events and constantly updated where it considers eventuality. So, it is necessary to consider the highly data-driven technologies and to use new methods of analysis, like machine learning and visualization tools, with the ability of interaction and connection to different data resources with varieties of data regarding the type of big data aimed at reducing the risks of policy-making institution’s investment in the field of IT. The main scientific contribution of this article is presenting a new approach of policy-making for the now-casting of economic indicators in order to improve the performance of forecasting through the combination of deep nets and deep learning methods in the data and features representation. In this regard, a net under the title of P-V-L Deep: Predictive Variational Auto Encoders - Long Short-term Memory Deep Neural Network was designed in which the architecture of variational auto-encoder was used for unsupervised learning, data representation, and data reconstruction; moreover, long short-term memory was adopted in order to evaluate now-casting performance of deep nets in time-series of macro-econometric variations. Represented and reconstructed data in the generative network of variational auto-encoder to determine the performance of long-short-term memory in the forecasting of the economic indicators were compared to principal data of the net. The findings of the research argue that reconstructed data which are derived from variational auto-encoder embody shorter training time and outperform of prediction in long short-term memory compared to principal data.

This study investigates monetary and financial shocks on macroeconomic variables, focusing on the role of banking intervention. For this purpose, a Keynesian dynamic stochastic general equilibrium (DSGE) model is designed for Iran’s economy that involves financial and banking sectors. The results of the model simulation show that the financial accelerator theory works in the Iranian economy. Also, the intermediary role is confirmed by the impulse response function. In other words, economic policies can impress on macroeconomic indicators more when banks intervene in the economy. Therefore, to control the effects of economic shocks on banks' performance, it has been suggested that monetary policymakers pay attention to the important roles of financial markets in the transfer mechanism and monetary policy intensity. On the other hand, because of mandatory rules of interest rates determination, banks have to establish a commission and nonprofit services instead of sharing income to decrease the effect of economic shocks.

According to Dong and Hayon's study in 2022, in order to improve monetary policy, banks may use indicators that can be used to control their monetary policy; The indicators used in this study include financing, market power, liquidity creation channel; So there is a possibility that these indicators have a role on monetary policy. In order to analyze the hypotheses of the research, the statistical population was selected from 2016 to 2021 and for 6 years and included commercial banks and financial institutions admitted to the stock exchange, and the statistical sample was selected using the elimination method and the number of 21 banks. The research method used is a descriptive-analytical method and historical research data was collected and classified by referring to financial statements and financial reports of commercial banks and financial institutions admitted to the stock exchange. The panel data method was used to analyze the statistical data; And in the analysis section, descriptive and inferential statistics and various related tests were performed and data analysis was done using Eviews version 9 software. According to the regression model analysis, the findings of the research show that bank financing, market power and the bank's liquidity creation channel have a positive and significant effect on the monetary policy of commercial banks and financial institutions admitted to the Tehran Stock Exchange, so that in this research, based on the statistics t The degree of effectiveness of special hypotheses was determined that bank financing, liquidity creation channel, and market power affect monetary policy, respectively.