Extracting the Phillips Curve Based on Real Exchange Rate for the Iran Economy by Generalized Method of Moments

اقتصاد پولی مالی

Article 5, Volume 27, Issue 19, June 2021, Pages 111-132   

Document Type: پژوهشی

DOI: 10.22067/mfe.2021.39355

Author

afsane javadi^*

PhD student in Economics, Ferdowsi University of Mashhad

Abstract

General Studies conducted in the field of the Phillips curve, in addition to past periods of inflation, output gap, unemployment, and real marginal cost of production used to show as effective variable on the right in Iran and other developing countries.  This is while the New Keynesian paradigm suggests that each country requires different models according to the specific conditions of its economy.
Theorical Framework
 In this Phillips study curve in New Keynesian paradigm’s frame work will be modeled and estimated sticky prices. Work’s idea is very simple. central Bank can to reduce Domestic money value unexpectedly. It does this work with increased supply in foreign exchange market. Finally increase in the money supply lead to increase the prices. However, prices and bondage, markets will be settled after a while and also there will be a combination of the read male of the lower currency and average inflation above equilibrium.
In this story modeling was do according to important role of oil in Iran’s economy. Study’s model has two sections: household and Business. Economic hous eholds maximize their utility are the functional from them consume and time work due to the balances of the whole economy (In addition to the profits of securities purchased by households, it’s income includes income from fixed existing sales from natural resource with random global prices in international market and the cost is the cost of buying inner mediate materials). Businesses also maximize their profits (which are a function of income from the sale of their goods at sticky prices and costs from purchasing imported raw materials and employment labor). But since export of find good produced in Iran is very weal and oil and gas formed the main exports of Iran. Therefore, with this theory that economic has the fixed existential from natural resource that sale in international market with random global prices can to said that extreme of export income is an exogenous variable them inter economic situation. Currency supply in Iran is stable and exchange rate change effect on currency demand and import rate and prices of important goods. Hence the change in the exchange rate on the one hand due to the increase in the prices of imported input was used in production. Through the optimization function, the producer profit changes the optimal price and itself to change in the optimal rate of labor hours of the labor force become through the production function and its desirability change by the consumer optimization function desirability. Consumer desirability changes their request for final goods and the service of the economy. Therefor change the prices. So, increase in optimal rate leads to a general level change in prices. This study is about Iran’s economic that is very depended to goods export such as oil, gas ond raw materials.  This good formed major share of Iran’s export and inter produced exported goods is very weak in this country.
The common Phillips curve includes the output gap (which is the difference between output and its flexibile price level). This level of the flexible production prices is not known and is usually estimated by the Log-linearization, or the quadratic trend or the trend obtained by using Hodrick-Prescott Filter and Band-Pass Filter.
Methodology
Philips curve estimating quarterly data for Iran’s economic since 1980-2018. Price indicator for consumer and inter gross generation has exploited from Iran central Bank’s data. Price indicator for foreigner consumer was used from American’s data to exploited U.S. Department of Labor Bureau of Labor Statistic. Estimation do in two section. First, digression red rate of optimal will computed from basic worth and then this deviation will have used in Philips curve regression. The Hadrick Prescott filter was used to estimate the deviation of the real exchange rate from the steady state value.
After designing the research model, it is time to estimate it. Rational expectation Philips carves regression (with forward expectations) cannot to be estimated by ordinary least squares method directly because; error terms depend on estimators.
One solution is to exchange current’s inflation, to inflational expectation. Therefore, Generalized Method of Moments which is estimated in a simple linear mode by the instrumental variable method has been used. Estimate show that coefficient of real exchange rate gap in estimated regression recommended.
J. Hanson statistics which is used to test the number of over-identified constraints (equal to the value of the minimum objective function), confirms the validity of model. Sargan Test shows the correlation of instruments with error term. The result express that this model stated properly and the selected tools are valid.
Results and Discussion
The results show that the standard New Keynesian Phillips curve can be expressed as an exchange between inflation and the real exchange rate for oil-exporting countries, including Iran. The intuition of such an equation is simple and not new:  the central Bank can temporarily devalue the domestic currency at the expense of imposing additional inflation on the economy. The results confirm the exchange between inflation and the real exchange rate under the Phillips curve based on the real exchange rate.
 
 
Conclusions and Suggestions
If the standard Philips New Keynesian Curve (according to what was done in this article) can be expressed as an exchange between inflation and the real exchange rate for oil-exporting countries, including Iran, it will have a significant impact on economic policy. As a policy proposal, the central bank temporarily devalues the domestic currency, but must consider this will impose additional inflation on the economy.

Keywords

Philips Curve; New Keynesian Paradigm; Real Exchange Rate; Iran Economic

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