Examination of the Effect of the Shock Caused by Monetary Policy and Oil Revenue on Inflation and Economic Growth in Iran

Monetary and financial affiliation, always closely linked to oil sector in Iran (as an oil exporter country) has made Monetary Policy a remarkable challenge to the economic policy- makers. In fact, according to expected statistics, a considerable amount of budget is provided by currency sources from oil export and withdrawal from foreign exchange reserve account by which Central Bank inevitably buys currency resulting to increase monetary base. Lack of possibility of mathematical anticipation and uncertainty of oil revenues to finance is one of the challenges monetary authorities encounter in Iran. Accordingly, mathematical programing for economic stability requires identifying the effect of Monetary Policy based on oil revenue. Examination of the effect of Monetary Policy in economics started with the theory of '' the amount of money''. Economic experts are of different viewpoints on the impact of Monetary Policy on Marco variables. According to theoretical and experimental literature, Monetary Policy makes an outstanding difference on Marco variables. On the other hand such policies are extinguished by oil revenue leading to more obscurity.

Theoretical framework:

According to the existing literature, the way of applying Monetary Policy is different in oil exporter and importer countries. when oil price rises, Central bank, In order to control inflation, increases the interest rate, and Monetary Policy acts as a contraction in oil importer countries. However, in oil exporter countries, when oil price rises, currency revenues, mainly in the hands of the government, increases, and the government, by converting part of oil dollars to domestic currency, intentionally or unintentionally, increases the amount of money to provide its expenses. So, in exporter countries like Iran, oil revenues directly affect economic Macro variables. They, also, indirectly affect through Monetary Policy.

The purpose of this study is to examine the effect of monetary policy on economic Marco variables due to oil revenues. This study has, also, used interest rate variable, bank facilities, and legal reserve rate on monetary policy. Such variables have been used, indoors or outdoors, in different economic studies. Basically, in this study, the economic Marco variables are also economic growth and inflation rate respectively due to the limited access to information and also other existing limitations. To measure the economic growth rate, GDP growth rate at a fixed price has been used. The inflation rate resulted from consumer price index growth rate (CPI). In this study, using STATA software, the variables have been used from the years 1978 to 2017.

The results of this study have shown that the rise in bank interest rate has run down the economic growth rate at least up to two years after applying the shock. It drifted towards zero afterwards. With the rise in bank interest rate growth, the cost of financing has been decimated resulting to investment reduction. On the other hand, with the rise in bank interest rate, the inflation rate has been reduced. It is obvious shock standard deviation in bank facilities interest rate has, up to three periods after applying the shock, left positive impact on inflation rate, and the impact has been reduced to zero. Economic growth reveals like bank facilities rate, such a variable has a negative impact on Iran's economic growth. The rise in legal reserve rate has been one period after applying the shock up to zero in the second period. On the other hand, the impact of legal reserve rate has been positive on inflation rate. It has been shown that shock standard deviation reduces inflation rate in legal reserve rate. The rise in oil revenues leads the rise in economic growth rate, thus, reduced to zero up to two periods after applying the shock. With increasing oil revenues, by the government's expenses increase as well. Thus, it leads to the rise in demand, and also, economic growth indoors.

Conclusions & Suggestions:

Based on the results, implementation of monetary policy in Iran has negative effect on economic growth, which is also consistent with the Iran Economy, so policymakers must use another policy for stimulating the economic growth. Put on the agenda.