An Analysis of the Relationship between Monetary-Exchange Rate Policies and the public Debt and Theirs Effects on Inflation and Economic Growth in Iran

Authors

1 Islamic Azad University, Sciences and Research branch

2 Tehran

Abstract

 Governments attempt to achieve the goals of low inflation rate and sustainable economic growth rate. The objective of this study is to analyze the roles of determinants such as the liquidity of money, weighted average of interest (profit) rate on banking deposits, exchange rate and the public debt on inflation and economic growth in Iran, using the quarterly data during the period of 1989-2008. This study is based on the theoretical works of the Sargent and Wallace (1981) by focusing on the ‘Fiscal Theory of Price Level (FTPL)’ approach. In this study, through relying on the structural relationship between variables and economic shocks, while applying the required constraints, the constructed models are estimated by VECM and SVEM methods. Findings of the study are consistent with both the quantity theory of money as it was interpreted with Sargent and Wallace (1981) and the FTPL. More specifically, the inflation rate is largely affected by monetary–exchange rate policies as well as by fiscal policy. Although, the weighted average of interest sate does not play a significant role in the long–run relationship, a rise in public debt through increasing the liquidity of money plays a significant role in rising price level. But, a significant long sun relationship between the changes in the liquidity of money, interest rate, the public debt and the change in output level does not exist. The economic growth does respond mainly to the technological shocks and factors productivity improvements. In general, we conclude that the inappropriate monetary and exchange rate policies and the rise in public debt through fiscal policy are the main determinants of the inflation rate in the Iranian economy.JEL Classification : E61, E63

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