MONETARY AND EXCHANGE RATE POLICY IN AN OIL EXPORTING ECONOMY: THE CASE OF IRAN

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JALALI NAINI AHMAD REZA; NADERIAN MOHAMMAD AMIN

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Journal: Journal of Monetary and Banking Research Year:2016 | Volume:9 | Issue:29 Page(s): 327-372

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Title

MONETARY AND EXCHANGE RATE POLICY IN AN OIL EXPORTING ECONOMY: THE CASE OF IRAN

Author(s)

JALALI NAINI AHMAD REZA | NADERIAN MOHAMMAD AMIN | Issue Writer Certificate

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Abstract

For those resource (oil) exporting countries that are exposed to the terms of trade shocks and follow pro-cyclical fiscal policies, standard flexible inflation targeting with floating exchange rate may not be a suitable monetary policy framework. One of the approaches that has been discussed in the literature to improve stabilization policy is to insulate fiscal policy from the balance of payment shocks through activating a Currency Reserve Fund (CRF). In the context of a DSGE model that captures structural characteristics of the Iranian economy, the effect of activating a CRF on stabilization and welfare performance of three inflation targeting regimes: domestic inflation targeting, CPI inflation targeting, and real exchange rate targeting is evaluated in this paper. For this purpose, first we evaluate stabilization and welfare performance of the above-mentioned regimes under the following conditions: high financial vulnerability; both high exchange rate pass-through and openness, along with complete raiding of the oil windfalls. We compare this policy scenario with the scenarios in which CRF is active. The simulation results indicate that in the first scenario the real exchange rate targeting is the optimal Ramsey policy and the monetary authority must react to currency misalignments. With an active CRF, real exchange rate fluctuations are diminished. This contributes to creation of an environment conducive for implementing flexible inflation targeting of CPI without repeated interventions by the monetary authority in the currency market.

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APA: Copy

JALALI NAINI, AHMAD REZA, & NADERIAN, MOHAMMAD AMIN. (2016). MONETARY AND EXCHANGE RATE POLICY IN AN OIL EXPORTING ECONOMY: THE CASE OF IRAN. JOURNAL OF MONETARY AND BANKING RESEARCHES, 9(29 ), 327-372. SID. https://sid.ir/paper/263724/en

Vancouver: Copy

JALALI NAINI AHMAD REZA, NADERIAN MOHAMMAD AMIN. MONETARY AND EXCHANGE RATE POLICY IN AN OIL EXPORTING ECONOMY: THE CASE OF IRAN. JOURNAL OF MONETARY AND BANKING RESEARCHES[Internet]. 2016;9(29 ):327-372. Available from: https://sid.ir/paper/263724/en

IEEE: Copy

AHMAD REZA JALALI NAINI, and MOHAMMAD AMIN NADERIAN, “MONETARY AND EXCHANGE RATE POLICY IN AN OIL EXPORTING ECONOMY: THE CASE OF IRAN,” JOURNAL OF MONETARY AND BANKING RESEARCHES, vol. 9, no. 29 , pp. 327–372, 2016, [Online]. Available: https://sid.ir/paper/263724/en

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