Oil Price Cycles, Fiscal Dominance and Counter-cyclical Monetary Policy in Iran

Ahmad Reza Jalali Naini and Mohammad Amin Naderian
Authors registered in the RePEc Author Service: Ahmad Jalali-Naini ()

MPRA Paper from University Library of Munich, Germany

Abstract: Impulse for business cycles in Iran are largely generated from oil price (terms of trade) shocks and propagated through fiscal policies. The classic mission of monetary policy is to conduct countercyclical policy, however, this is not a universal norm. Pro-cyclical fiscal and monetary policies during boom periods has been observed in a number of developing countries. Such policies tend to amplify the impact of positive oil price (terms of trade) shocks through aggregated demand expansion. The consequence has been strengthening of domestic inflationary pressures and appreciation of the real exchange rate. This paper attempts to examine if monetary policy in Iran is countercyclical and what is the impact of fiscal policy in this regard. It will be argued that the stance of fiscal policy and how government expenditures are financed can have a significant effect on how monetary policy is conducted. Our empirical observations regarding the experience of the Iranian economy indicates that, in a fiscally dominated structure, fiscal and monetary policies are generally expansionary, particularly during economic booms. This entails subsequent very large managed depreciation of the exchange rate, higher inflation rates, and an economic downturn. Under fiscal dominance monetary policy will be ineffective and both targets and instruments of monetary policy making will not be under the control of monetary authority. The policy package of a structural balanced fiscal rule combined with smoothing of quasi-fiscal operations is the appropriate policy measure that enhances the ability of central bank to conduct more effective countercyclical monetary policies.

Keywords: Pro-cyclicality; Fiscal Dominance; Monetary policy; Ricardian (search for similar items in EconPapers)
JEL-codes: E5 (search for similar items in EconPapers)
Date: 2017-08-01
New Economics Papers: this item is included in nep-ara, nep-cwa, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://mpra.ub.uni-muenchen.de/84480/1/MPRA_paper_84480.pdf original version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:84480

Access Statistics for this paper

More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Joachim Winter ().