Policy Making Requirements for Inflation Targeting Framework in Iran: Applying SVARX Model

Low and stable inflation rates are essential to promote economic growth and welfare of the people. Therefore, many countries pursue their policies within the framework of inflation targeting to achieve low and stable inflation rates. Monetary policy implementation based on inflation targeting is a framework that has been adopted by many countries since 1990. To implement such framework, a series of structural and policy-making reforms should occur in many sectors of the economy. This paper concentrates on policy-making reforms and, by applying SVARX model, attempts to identify and introduce policy-making reforms appropriate to inflation targeting framework. The results of the paper show that SVARX model with inflation, liquidity growth, budget deficit growth and economic growth as endogenous variables, and exchange rate growth and two dummy variables, for controlling the effects of eliminating subsidies and inflation expectation break, can present policy-making reforms appropriate to inflation targeting framework.