Ahmad R . Jalali-Naini

The crude oil price exhibits a high degree of volatility which var-ies significantly over time. Such characteristics imply that the oil market is a promising area for testing volatility models. Testing and predicting volatility using ARCH and GARCH models have grown in the literature. A ...

Monetary policy as a tool for expectations management is believed to be most effective if it can coordinate the beliefs and expectations of the economic agents. The optimal communication policy is in an environment where central bank announcements are common knowledge and abundant information is complete transparency. The above conclusion is altered in the more realistic situation where economic agents face uncertainty regarding underlying economic fundamentals combined with strategic complementarity between player's actions. The optimal communication policy in a case with imperfect common knowledge is incomplete transparency or a degree of opacity. Uncertainty about the underlying economic state in the presence of strategic complementarity is the origin for the emergence of imperfect common knowledge. We further develop these issues in the context of a Lucas-island model. Full policy transparency in this setting leads to an economic distortion residing in a wedge between econom...

Motivated by recent experiences in Iran, this paper incorporates structural characteristics that reinforce the reluctance of central banks to commit to free floating exchange rates (‘fear of floating’) into optimal policy formulation to determine the extent of exchange rate involvement in monetary policy. We utilize a small stylized model of a small developing open economy calibrated for the Iranian economy to compare the performance of alternative policy regimes, namely flexible domestic inflation targeting, flexible consumer price index inflation targeting, and real exchange targeting in handling higher openness, higher exchange rate pass through, and financial vulnerability. Evaluation of the above alternative policy regimes and relative stability of key macroeconomic variables are conducted through an optimal Ramsey policy approach. The results suggest that, in financially vulnerable small open developing economies, consumer price IT may not be the optimal policy and giving a higher positive weight to the real exchange rate in the central bank’s loss function and allowing policy reaction to this variable via the instrument rate can result in a lower social loss and more stability for the key macroeconomic variables, and hence a superior policy regime. Policy evaluation results based both on stabilization and welfare measures obtained in this paper imply that for the developing commodity (oil) exporting economies with high degrees of financial vulnerability and relatively high pass-through rates, an IT policy framework in which the real exchange rate is also targeted is a superior regime.

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...

The Ramey (1993) method (label here “Blocked Effect Approach”) is widely used in the empirical papers on monetary policy transmission mechanism channels. Its broad application is due to the relatively simple way, providing a criteria for identifying monetary transmission channels. In doing so it imposes too many restrictions on the parameters of the underlying VAR system, typically used for this type of empirical analysis. However, “blocked effect approach” may not coincide with the theoretical restrictions required by a proper definition of a monetary transmission channel. In this paper an attempt is made to define a statistical procedure to remedy certain shortcomings of this method. This modification also relaxes the unnecessary restriction and direct to a more precise measurement of channel strength. Finally we apply this method to credit channel of monetary policy transmission in the US economy. The modified blocked effect can distinguish channel strength between different variables in different sub-sample periods. Our empirical results show that it is an active channel of monetary policy; it effect output in the short-run and inflation with 12 quarters lag.

... 1 We are grateful to Habib Fetini, Farrukh Iqbal, Abolfazl Khavari-Nejad, Mohammad-HadiMahdavian, and Carlos Silva-Jauregui for useful discussions, to anonymous referee for valuable comments, and to Jerzy Rozanski for providing international trade data. ...

This paper seeks to evaluate the effects of expansionary monetary policy by the central bank on inflation, output and employment in a limited-participation model for different parameters value of inter-temporal elasticity of substitution and the Frisch (inverse of the labor supply) elasticity. To this end, a modified cash in advance model in line with Lucas (1990), Christiano (1991) and Fuerst (1992) is utilized to account for liquidity effect and anticipated inflation effect simultaneously. The utility function in this model has a CRRA specification in order to perform the sensitivity analysis of the key variables of the model. A range of parameter values for the economy of Iran is used to show the dependency of the results on the size of the coefficient of relative risk aversion and the Frisch elasticity. The simulation results, given the structure and limitation of our model, show that the injection of liquidity to the banking system is inflationary and is not a reliable policy t...

In a rational expectation utility optimization model, the consumption profile is smoothed over time and, under some simplifying assumptions, it equals a constant fraction of total lifetime income. For this result to hold, the consumer must be able to transfer income from one period to another. Otherwise, the consumer is under liquidity constraints. The liquidity constraint affects the allocation of durable and non-durable consumption. We focus on the relationship between the marginal utility of household durable good stock and the marginal utility of non-durable consumption. When capital markets are perfect, the marginal utility of these two variables always bears an equilibrium relationship. But if liquidity constraints are binding, the difference between the lagged value of these two variables can predict the current growth change in non-durable consumption. We estimate the long-run relationship between these two variables using an error correction model and a pseudo-panel data se...

This paper seeks to evaluate the effects of expansionary monetary policy by the central bank on inflation, output and employment in a limited-participation model for different parameters value of inter-temporal elasticity of substitution and the Frisch (inverse of the labor supply) elasticity. To this end, a modified cash in advance model in line with Lucas (1990), Christiano (1991) and Fuerst (1992) is utilized to account for liquidity effect and anticipated inflation effect simultaneously. The utility function in this model has a CRRA specification in order to perform the sensitivity analysis of the key variables of the model. A range of parameter values for the economy of Iran is used to show the dependency of the results on the size of the coefficient of relative risk aversion and the Frisch elasticity. The simulation results, given the structure and limitation of our model, show that the injection of liquidity to the banking system is inflationary and is not a reliable policy t...

Oil prices behave differently over different time-horizons. For the short run, we examine the pattern of movements in crude oil prices over business cycles and test whether price increases influence global output and/or are influenced by economic cycles. For the long run, we focus on whether "shocks" to crude oil prices are persistent or not. Our findings indicate that the price of crude oil exhibits substantial cyclical behaviour, as verified by several tests carried out in this paper. The VAR analysis indicates that the price of oil is a pro-cyclical variable. Moreover, the results show that, while, during the 1972-2003 period (when OPEC exerted more influence in the oil market), the oil market experienced substantial fluctuations in price, the price cycles were mean-reverting and not shock-persistent. This could indicate that OPEC market power can have stabilising effects. Copyright 2004 Organization of the Petroleum Exporting Countries.

The Ramey (1993) method (label here “Blocked Effect Approach”) is widely used in the empirical papers on monetary policy transmission mechanism channels. Its broad application is due to the relatively simple way, providing a criteria for identifying monetary transmission channels. In doing so it imposes too many restrictions on the parameters of the underlying VAR system, typically used for this type of empirical analysis. However, “blocked effect approach” may not coincide with the theoretical restrictions required by a proper definition of a monetary transmission channel. In this paper an attempt is made to define a statistical procedure to remedy certain shortcomings of this method. This modification also relaxes the unnecessary restriction and direct to a more precise measurement of channel strength. Finally we apply this method to credit channel of monetary policy transmission in the US economy. The modified blocked effect can distinguish channel strength between different vari...

This paper aims to identify a monetary policy framework suitable for a small open economy characterized by financial vulnerability, a high exchange rate pass-through, a procyclical fiscal policy, and terms of trade volatility. Based on a New Keynesian DSGE model adapted to include these characteristics, we compare policy evaluations of two different monetary policy regimes (standard inflation targeting and real exchange rage targeting) to find out which policy regime is superior in terms of welfare loss and macroeconomic stability. Model parameters are estimated through Bayesian methods using quarterly data for the Iranian economy during 1990–2017 period. It is found that under the above setting, inclusion of real exchange rate in a broader inflation-targeting framework is the superior policy arrangement, particularly when fiscal policy is procyclical. We explain why under the presence of financial vulnerability departure from free floating is the appropriate policy and reaction to ...

We examine permanent effects of monetary expansion in an economy where access to credit for financing consumption and investment is limited and consumers and firms are cash-constrained. The main difference between our model with those of Cooley-Hanson (1989) and Walsh (2003) is that investment, in addition to consumption, is subject to a cash-constraint. In this respect, our model is similar to Stockman (1981) and Abel (1985) but different from them in that they do not provide for labor-leisure choice. Moreover, in contrast to Stockman and Abel we follow Svensson's (1985) timing sequence in that the asset market opens after the goods market. A version of Cooley and Hanson model is calibrated with the data on the economy of Iran. We compare the business cycles and output and consumption moments generated from simulated data to the moments extracted from the actual data. From the impulse-response functions we also derive the effect of a positive monetary shock on output and inflat...

Price stability has been the foremost task of monetary policy. The information relating to the response of prices to monetary policy shocks is essential for conducting monetary policy in general and for inflation targeting of central banks in particular. Most of the published empirical studies analyze the response of an aggregate price index like CPI or a consumption deflator and their rates of change to monetary shocks. A limited number of studies that examine the effect of monetary shocks on disaggregate prices use vector auto regression models for the analysis. The results of these studies show that some disaggregated prices increase slightly in response to a contractionary monetary shock. This finding can be inconsistent with the standard theory and is referred to as the "price puzzle" in literature. There is a body of new literature (Bernanke et al. 2005, Boivin, Giannoni and Mihov 2009) that utilizes factor augmented VAR (FAVAR) approach to analyze the effect of mone...

Determining how monetary policy makers react to changes in key economic variables has been of major interest to monetary economists. Estimates of monetary policy rules (reaction functions) are a widely used method for doing this. Behavior differs under different policy regimes, as in rule-based systems or chronic inflation. In practice, estimates of instrument rules have been used to describe how the central bank alters its policy in response to expected macroeconomic events. In this paper we provide linear and non-linear estimates for various instrument rules for Iran. Linear estimates show that monetary policy in Iran tends to accommodate rather than counteract inflationary pressures. More generally, the estimates indicate that Central Bank of I. R. Iran does not systematically follow any of the well-known instrument rules or hybrid types. Non-linearity tests were performed and the null hypothesis of non-linearity of the monetary policy reaction function with respect to inflation ...

... The average size of government expenditure as a percentage of GDP with official data is 23.7 ... expenditures—for instance, in 2001 taxes comprised 30.9 percent of total government revenue. As a consequence, inflation tax as a proportion of total revenue has been significant.19 ...

The crude oil price exhibits a high degree of volatility which var-ies significantly over time. Such characteristics imply that the oil market is a promising area for testing volatility models. Testing and predicting volatility using ARCH and GARCH models have grown in the literature. A ...