Studying the effect of monetary policy on the exchange rate in uncertain conditions and its effects on the added value of economic sectors in Iran (Application of RDCGE model)

Monetary policies serve to create economic stability and maintain price stability. It is one of the central bank's powers to implement monetary policies. In other words, the central bank has the necessary freedom of action to use its policy tools in operational goals in order to influence its intermediate goals, i.e. the growth of the volume of money and liquidity in order to achieve its ultimate goals, i.e. economic growth and price stabilization. Considering the negative effects of uncertain conditions on the country's economic situation due to the uncertain future of the country's economy, evaluating the effects of monetary policies on the exchange rate in uncertain conditions and the value added of economic sectors (industry, agriculture and services) is of undeniable importance. This can prevent harmful effects addressed in this research.

In order to meet the research goals, the required data were gathered from Social Accounting Matrix (SAM) of Parliament Research Center of Iran and the input-output table of the central bank of Iran (CBI). Also, dynamic computable general equilibrium models were divided into interim and recursive categories. The interim models are based on the optimum growth theorem which assumes that economic agents have the ability of complete prediction, while this is not correct in many economic circumstances, especially in developing countries. Hence, many economic experts believe that recursive models are more trustable. This research is conducted based on the recursive dynamic computable general equilibrium (RDCGE) model and impulse response functions (IRF) through making shocks on monetary policy indexes including the increase in liquidity volume (2%, 5% and 10%). In addition, the data are analyzed with the Matlab software.

The results showed that the shock caused by a 5% increase in liquidity increases the exchange rate by 0.29% in the first period, 0.66% in the second period, 0.97% in the third period, and then it is neutralized. The shock caused by a 10% increase in liquidity increases the exchange rate by 1.06% in the first period, 1.46% in the second period, 1.98% in the third period, and then it is neutralized. The shock caused by the 20% growth of liquidity increases the exchange rate by 1.17% in the first period, 2.21% in the second period, 3.08% in the third period, and then it gets neutralized. In general, it can be concluded that the shocks of the increase in the liquidity, due to the increase in the total volume of money, leads to a decrease in the value of the national currency versus foreign currencies. The price of the US dollar thus increases inside the country.The shock caused by a 5% increase in the liquidity reduces the value added of the industry and mining sector by 2.65% in the first period, by 3.19% in the second period, and then it gets neutralized. The shock caused by the 10% growth of liquidity reduces the value added of the industry and mining sector by 3.03% in the first period, by 4.00% in the second period, and then it is neutralized. The shock caused by the 20% growth of the volume of liquidity reduces the value added of the industry and mining sector by 4.33% in the first period, by 5.04% in the second period and then is neutralized. In general, it can be concluded that the shocks of the increase in the liquidity lead to an increase in the inflation rate and production costs and, finally, it reduces the value added of the industry-mining sector.The shock caused by a 5% increase in the volume of liquidity reduces the value added of the service sector by 1.97% in the first period, by 2.24% in the second period, and then it gets neutralized. The shock caused by the 10% growth of liquidity reduces the value added of the service sector by 2.63% in the first period, by 3.05% in the second period, and then it is neutralized. The shock caused by the 20% growth of liquidity reduces the value added of the service sector by 3.81% in the first period, by 4.01% in the second period, and then it is neutralized. In general, it can be concluded that the shocks of increasing the liquidity lead to an increase in the inflation rate and the cost of services and, finally, it reduces the value added of the service sector.The shock caused by a 5% increase in the liquidity reduces the value added of the agricultural sector by 1.16% in the first period, by 2.09% in the second period, and then it is neutralized. The shock caused by a 10% increase in the liquidity reduces thevalue added of the agricultural sector by 2.03% in the first period, by 2.89% in the second period, and then it becomes neutral. The shock caused by the 20% growth in the liquidity reduces the value added of the agricultural sector by 2.67% in the first period, by 3.19% in the second period, and then it is neutralized. In general, it can be concluded that the shocks of increasing the liquidity lead to an increase in the inflation rate and the production costs of the agricultural sector and, finally, it reduces the value added of the agricultural sector.

Conclusion and Policy Implications:

 It can be concluded that, among the examined economic sectors, the shock caused by the increase in volume of liquidity has a more negative effect on the value added of the industry, mining, services and agriculture sectors, respectively. Considering the positive effect of exchange rate fluctuations and uncertainty on increase in liquidity and, as a result, the reduction of the value added of economic sectors, it is suggested to policy makers to avoid the decisions that cause disturbances and fluctuations in the currency market. Finally, the central bank should pay attention to the impact coefficient of each shock on the value added of each economic sector and apply economic decisions considering these effects and the target sector considered as the leading sector.