Central Bank Lending, Inflation and Output Dynamics in a Limited Participation Model (original) (raw)
Related papers
Inflation and Output in a Cash Constrained Economy
2011
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...
2019
The welfare cost of inflation in a new Keynesian model has been studied in this article. Nominal prices and wages are subjected to Rotenberg's adjustments in the benchmark model. In addition, this study uses the CIA model to compare the welfare cost of seigniorage tax and consumption tax. The model is calibrated for the Iranian economy and the results of the calibration are as following: In a steady state, a seigniorage tax imposes higher costs on social welfare rather than consumption taxes. We also find that the welfare cost of inflation increases linearly with the inflation rate and the welfare cost in a model without the government is higher than the model with government expenditures. Numerically, in the benchmark model, an annual inflation rate of 10% entails a welfare cost (relative to a -1.5% annual inflation rate, the Friedman Rule’s level of inflation rate) of 1.69% of steady state consumption without a government. If we add the government to the model, this cost will be 1.2...
Journal of Money and Economy, 2020
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.
Monetary Policy and Inflation Dynamics in Iran: New Evidences
Journal of Development and Capital, 2019
The monetarists, in explaining the dynamics of inflation, have emphasized the growth rate of the money supply. However, there is extensive empirical evidence to validate and validate this monetary logic. There are a number of criticisms already suggest that the monetarists may exaggerate the emphasis on the role of money supply in raising inflation. Therefore, the purpose of the present study is to investigate the extent to which inflation is caused by monetary phenomena in Iran Method: In this paper, the impact of money supply and other factors influencing inflation including production, exchange rate and international oil prices are investigated. The analysis was performed using the instantaneous reaction functions and SVAR econometric models. Results: The empirical results generally indicate that money supply is a key source of inflation in Iran. According to the research findings, all of the estimated variables have a key role to play in increasing inflation in the economy. By comparison, real output has the lowest share, especially in the short run, while inflation is more sensitive to short and long run money shocks Conclusion: The overall conclusion of the present study is that inflation in Iran is relatively a monetary phenomenon rather than an actual factor
Theoretical and Practical Research in the Economic Fields
This paper focuses on New Keynesian framework for monetary policy analysis of Iran. It considers a dynamic stochastic general equilibrium (DSGE) models. This article expands a sensitivity analysis of the optimal rules to deep structural parameters and investigating properties of an optimal simple rule with respect to prevailing type of shocks which is the main purpose of the article. Finally, the study highlights how an optimal policy rule depends on model structure, on the model calibration and nominal rigidities. According to the research findings, based on the theoretical expectations, the effect of a positive shock inflicted on the government investment leads to an increase and gradual accumulation of fixed capital formation in the public sector. Among estimated parameters, consumption is the first affected and reduces, then employment increases consequently, finally production will also be affected. Also with the shock of oil revenues, increased oil revenues which results in pu...
Investigating the effect of liquidity on inflation in Iran
AFRICAN JOURNAL OF BUSINESS MANAGEMENT, 2012
In this paper, equivalence relation and long term of six variables gross domestic product, domestic deposit rates, foreign interest rates, nominal exchange rate, size liquidity, inflation rate and also their influences on each other in Iran and for years 1973 to 2008 has been analyzed. For this purpose, vector autoregressive model (VAR) has been used. First, stability of variables by the use of dickey-fuller test has been examined. Next, analysis of Johnson test for considering the convergence among five variables has been used. The results of this research show that variables of domestic deposit rates, foreign interest rates, size liquidity, have positive effect on inflation rate. Also variables of nominal exchange rate, gross domestic product, have a negative effect on inflation rate.
On the employment, investment and current account effects of inflation
Journal of International Economics, 2006
The effects of inflation targets are examined for a small open economy with cash in advance constraints. An increase in the inflation rate, by increasing the price of consumption relative to leisure, reduces consumption and labor supply. The fall in labor reduces the marginal ...
Welfare Characterization of Monetary-Applied Models and Three Implications
This paper demonstrates that the applied monetary models-the Sidrauski-type models and the cash-in-advance models, augmented with a banking sector that supplies money substitutes services-imply trajectories which are Pareto-Optimum restricted to a given path of the real quantity of money. As a consequence, three results follow: First, Bailey's formula to evaluate the welfare cost of inflation is indeed accurate, if the longrun capital stock does not depend on the inflation rate and if the compensate demand is considered. Second, the relevant money demand concept for this issue-the impact of inflation on welfare-is the monetary base. Third, if the long-run capital stock depends on the inflation rate, this dependence has a second-order impact on welfare, and, conceptually, it is not a distortion from the social point of view. These three implications moderate some evaluations of the welfare cost of the perfect predicted inflation.
After the 2008 Financial Crisis, The Central Bank is Turkey as well as many countries, has implemented a policy of increasing the money supply. It is a known fact that the changes in the money supply are considerable extent determinative in interest rate and inflation rate such as orientations of macro economics variables. The purpose of this study is to investigate the relationship between money supply, interest rate and inflation rate in Turkey after the 2008 Financial Crisis. In accordance with this purpose, 2008:1-2015:12 period money supply, interest rate and inflation rate monthly data are used. Commonly in applied studies, the relationship between these variables is analysed with Cholesky Decomposition Method of Variance based Vector Autoregression Model (VAR). But this method is affected by ordering of the variables according to endogeneity-exogeneity approach, when ordering of the variables were changed, the results are changed and therefore policy proposals are changed. In analysis of the study, both Cholesky and Pesaran and Shin's proposal method is used. According to Cholesky Variance Decomposition result at the end of the a month, when all changes in inflation is explained by inflation, this rate is 85% according to Generalized Decomposition Method of Variance result.
2021
The flow of funds account provides information on various economic sectors’ financial transactions. The present study has investigated the impact of monetary shocks on the dynamics of lending and borrowing of various economic sectors such as households, non-financial enterprises, the banks, the Central Bank of Iran (CBI), the government, and the foreign sector as well as the changes in financial assets and liabilities of mentioned sectors. An accurate analyzing in this regard could provide helpful guidance in making the appropriate policies for influencing macroeconomic variables. For this purpose, a FAVAR model was employed using data from 1973-2017. It was concluded that monetary shocks increased both the acquisition of new financial assets and the issuance of new liabilities of various national economic sectors and the banks were net borrowers from other economic sectors while other sectors – except the non-financial enterprises and the government that response with a delay– were...