Lack of Independency in Monetary Policy and the Role of Oil Price in Monetary and Fiscal Policy: he Case of Iran

This paper investigates monetary policy independency, as well as its weakness and the role of factors affecting it. It seems that because of interest rate determination in Iran's Economy which is irresponsive to nominal variable fluctuations, the role of central bank has been deviated from an active institute toward a passive one. For this purpose, Taylor rule was investigated for Iran's Economy using quarterly data. Based on the results, although the coefficient of interest rate is statistically significant, it is very small and close to zero. This shows that interest rate does not respond to the deviations of inflation. Considering the complexity in the structure of Iranian budget constraint and its severe dependency to oil revenue fluctuations, it is clear that the oil revenues have considerable impacts on fiscal policies and hence central bank and monetary policy are substantially influenced. Based on the results of this paper, the cyclical component of nominal money, monetary base components and prices are strongly contemporaneously correlated with oil revenues and at most after one period they respond to the oil revenues fluctuations. In the long run, based on co-integration analysis, price levels are substantially affected by budget deficit and net of central bank's foreign asset and both of them are correlated negatively in the long run, as well as both of them are affected by oil prices. In addition, IRF shows that the responses of net of central bank's foreign asset, budget deficit, liquidity and price level to a positive oil shock are so similar to the realized fact in Iran's Economy.