Journal of Money & Economy
Volume:6 Issue: 1, Fall 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 toa 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 comparethe 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 inflation.

The conventional wisdom in economic theory prescribes that the major role of the Central Bank is to design and conduct active monetary policy aiming at curbing inflation and achieving the price stability. After half a century of endeavors in attaining this target, Central Bank of the Islamic Republic of Iran has gone through tumultuous periods gaining mixed results in its efforts. The assessment of the performance of the CentralBank of the Islamic Republic of Iran (CBI) is also important from another aspect which is the experience of Central Bank in implementation of Shariah-based Islamic banking in Iran. The Usury (interest) Free Banking Law of Iran was legislated a few years after theIslamic Revolution of 1979 and opened a new horizon in the banking practices in Iran. Since the main purpose of this study is to evaluate and compare the performance of the central Bank of Iran primarily on inflation rate under the two sp ecific Money and Banking Laws, therefore, we will not deal explicitly with the theoretical aspects of the issue. In another word, we assume that the monetary authority has attempted to conduct the monetary policy on the basis of theoretical foundations to achieve low and stable inflation rate. We conclude that in the review period (1972-2010), except for the 3rd Plan period (1379- 1383 (2000-2005)), Central Bank of the Islamic Republic of Iran has nothad an acceptable progress in attaining the aims of monetary policy. Also, in this study we will analyze challenges ahead of efficient implementation of monetary policy in Iran.

Comparison of the private consumption extracted from the Household Budget Survey and the National Accounts in Iran reveals that not only the latter always exceeds the former, but also the gap between them has increased over time. In this paper we propose a method to eliminate the discrepancy between these two sources. We integrate the micro and macro data and compare the poverty indicators in Iran for 1991-2007.Then we decompose the poverty changes over time according to socioeconomic characteristics of Iranian households into the exact sum of three independent components, i.e. growth, inequality and population effect. Results show that the total poverty changes in Iran in the previous years have been most affected by the growth effect and least affected by the population effect. The growth and overall effects have always had the same direction in the previous years in Iran.

In Iran, interest rate is regulated by government by setting a ceiling for the credits allocated to various economic sectors. In recent years, the old theory of financial repression in the form of reducing interest rate of credits has been considered as a necessity to stimulate and encourage investment and economic sectors expansion in Iran. This study investigates the effects of this policy on the growth of investment andproduction and other macro-economic variables in the context of the economy of Iran. To this end, we modified and extended the ORANI-G CGE model to appropriately present Economy of Iran and to include financial sector. This real- financial CGE model constitutes of 46 sectors producing 60 commodities and services. Then, we used this model tosimulate a 4 percent reduction in interest rate of credits in all economic sectors. Results revealed that, following this policy the real GDP and total fixed capital formation will face a growth rate of 1.2 and 1.86 percent, respectively. Employment rises by 0.71 percent and overall export experiences 2.84% growth rate which leads to the 0.1%improvement of balance of trade. Following a reduction in interest rate of credits, the prices of commodities and services decline which result in reduction of inflation rate by. 53 percent. In addition, households income and savings (urban and rural) increase by 0.54 and 7.83 percent, respectively. Consequently, it seems in the context of the Economy ofIran, the policy of financial repression causes positive impacts on the importance of macro-economic variables.

The literature on the benefits and costs of financial globalization for developing countries has exploded in recent years. There seems to be a consensus that financial globalization has had a "discipline effect" on monetary policy, because it has reduced the returns from using monetary policy to stabilize the output. As a result, monetary policy over recentyears has placed more emphasis on stabilizing inflation, leading to lower inflation and higher output stability. However, this consensus has not been accompanied by convincing empirical evidence that such a relationship exists.In this article, we study the relationship between financial globalization and monetary policy regulation in a sample of 22 developing countries over the period of 1990 to 2006 using panel data approach. Our results confirm a negative relationship between financialopenness and median inflation rates. It therefore appears to be the case that financial openness is one of a number of characteristics of those countries exhibiting monetary policy stability. The result is consistent with those in Kose et al. (2006) who concluded that the primary benefits of financial globalization may precisely be "collateral benefits" uch as the possibility of enhanced monetary policy outcomes.However, the recent "sub-prime" financial turmoil has highlighted the possibility of the increased sophistication as a result of financial globalization. As asset bundles became more diversified, it appeared to be more difficult to assess the underlying asset quality of investment positions. The crisis does raise the question of whether losses incurredfrom investment vehicles increasingly used in the globalization period will force investors to avoid these types of vehicles in the future, and in the meantime lower the pace of financial globalization. Examining this issue is beyond the scope of this study and awaits future research.

In this study a simulation analysis is applied to address the change in banks liquidity demand due to a shift in settlement method brought about by adopting Real Time Gross Settlement System. At the first stage of this research, we use a data generator model along with some information on the time distribution of coded cheques over a working day in order to produce intraday flow of payments. Then the output is fed to the Bank ofFinland Payment Settlement Simulator (BoF-PSS) to estimate banks intraday liquidity needs in Satna. The results indicate the movement towards a real time gross-settlement system increases the liquidity demand of Iranian banks in payment system by about 66 percent.

A global economic recovery is expected to be ignited in 2010 but this will be characterized by very different growth trajectories among advanced and emerging economies. The downside risks are formidable. Sustaining this recovery will require skillful macroeconomic management. Exit strategies for fiscal stimulus will need to be carefullytimed and credi ble fiscal consolidation plans need to be designed,implemented and communicated to all stakeholders. Monetary policies that go beyond a narrow focus on consumer price inflation would need to be redesigned and implemented. More effective financial supervision and regulation that incorporate the lessons learnt from the financialcrisis must be effected and carefully coordinated with monetary policy. Greater flexibility in exchange rates that would curb global imbalances is needed. Looking ahead, a new social compact would need to be determined to both chart the recovery and sustain long-term growth and employment. The crisis is likely to usher fundamental and far reachingchanges in economic decision making.