Investigation the Effects of Disinflation Monetary Policies on Economic Security and Growth in Iran

اقتصاد و توسعه منطقه ای

Article 5, Volume 30, Issue 25, June 2022, Pages 140-179   

Document Type: Original Article

DOI: 10.22067/erd.2023.79685.1150

Authors

Hamid Khavari¹; taghi ebrahimi salari^{* 2}

¹Ph. D Student of Monetary Economics at Ferdowsi University of Mashhad.

²Associate Professor, of Ferdowsi University of Mashhad

Abstract

 
1- INTRODUCTION
   Economic insecurity means the existence of risks limiting economic growth. On the other hand, considering that economic insecurity has important effects on consumption decisions, savings and labor market balance, it can be said that economic security is an important part of economic well-being, which is largely affected by the country's economic policies. Policies and programs to deal with inflation and especially the effect of monetary policies on the nominal and real variables of the economy is one of the most important topics in the literature of monetary economics. Price stability is considered as the main goal of monetary policy in almost all countries. In order to achieve low and stable inflation, effective and efficient tools should be used in monetary policy affairs. Of course, the correct understanding of the concept of inflation and the factors affecting is considered essential to achieve price stability. Economists believe that the costs that inflation imposes on society can be much more serious than the costs of slowing down economic growth. Instability resulting from inflation not only damages the credibility of macroeconomic policymakers, especially the central bank, but its continuation can also cause acute cases of political instability in countries. In this regard, demand management policies and especially monetary policies are one of the important tools to achieve these goals. Monetary policies are without a doubt the most direct influencing and determining factor of inflation, and by using and correctly guiding monetary policies, one can achieve stable economic growth while achieving low and stable inflation. Trade-off between inflation and unemployment has always been the concern of economists and basic theories such as the Phillips curve have been proposed in this regard. Economists have generalized the aforementioned trade-off and used economic growth instead of unemployment and put forward a concept called the sacrifice ratio. Sacrifice ratio shows the amount of lost production per 1% reduction in inflation, and along with the Phillips curve, it has always been very important in the direction of government and central bank policies, especially contractionary policies.
 
2- THEORETICAL FRAMEWORK
   Based on this, the purpose of this study is to investigate the effects of inflation-fighting monetary policies on economic growth and security in Iran. As a result of the study, the costs of a deflationary policy are also measured in terms of lost production during the years (1998-2021). For this purpose, after examination the theoretical foundations of the research in relation to the concept and indicators of economic security, the benefits and harms of inflation on the risks that reduce economic growth and security, and the effects of policies to deal with inflation, a review of the background Studies of the studied subject are carried out.
 
3- METHODOLOGY
   This research examines changes in economic growth and economic security index in Iran. Through modeling the application of a contractionary monetary policy for the period of 1988-2021 by using the Structural Autoregression model (SVAR).
 
4- RESULTS & DISCUSSION
   Our results show that the contractionary impulse on the growth of the country's liquidity has a negative reaction on the growth of GDP per capita in the short run. But in the long run and gradually with the reduction of inflation, its initial effects will be moderated and the country's economic growth will improve. Based on this, the calculated production sacrifice ratio is -3.52. According to the results of the research, the negativeness of the calculated ratio means that in Iran's economy, the application of monetary policy to achieve a lower inflationary trend has a long effect interval (about five years). Over the years, production not only compensates for its initial decrease over time, but also increases by 3.52%. Also, in the examination of the relationship between the economic security index and the negative impulse of the monetary policy, it can be seen that it has a negative reaction in the short run, which is mostly due to the direct effects of the reduction in production growth and also the reverse effects of the growth of the prices on the economic security index. In the long run, the gradual decrease in inflation leads to the improvement of the economic security index. The results also show that both in the short run and in the long run, the most important variable affecting the changes in production growth is the impulse resulting from the economic security index, which indicates the great importance of the stability of economic conditions, whether the absence or reduction of unemployment risks, the risk of growth of health costs and private treatment shows the risk of poverty and risks caused by inflationary uncertainties.
 
5- CONCLUSIONS & SUGGESTIONS
   To achieve the purpose of conducting the study we investigated the effects of disinflation monetary policies on the country's economic growth and security, as well as measuring the costs of a deflationary policy in terms of lost production during the period under review, first, the economic security index based on Ozberg and Sharp's study (2001) calculation and its trend was analyzed. Then, by specifying the theoretical model of the research, the stationary of the variables was checked by using the Augmented Dickey-Fuller test. The final variables used in this research are: economic security index, per capita GDP growth, liquidity growth and inflation changes. The results of the Augmeted Dickey-Fuller stationary test showed that all these variables have unit root. Next, the SVAR model was estimated and structural constraints were applied, and after that, impulse response functions and variance decomposition were analyzed. The results showed that the contractionary impulse on the growth of liquidity has a negative reaction on the part of production growth in the short run, but in the long run due to its moderating effects on the country's inflation, the economic growth gradually increased and its fluctuations trended up to 7 periods are completely lost. According to the definition of production sacrifice ratio, it measures the accumulated loss in real production as a result of a permanent decrease in the inflation process. It is observed that with the applied deflationary policy, it takes about 5 periods (years) for inflation to be permanently moved to a lower level. The reduction rate of inflation is about 0.17%. Also, the total production loss due to the application of this policy during the five-year period is equal to -0.6%. Therefore, the calculated sacrifice ratio is equal to -3.52. The negativeness of the calculated ratio means that in Iran's economy, applying monetary policy to achieve a lower inflationary trend has a long effect interval (about five years) and during these years, not only production compensates its initial decrease over time, but also increases by 3.52%. Also, in the examination of the relationship between the economic security index and the negative impulse of the monetary policy, it can be observed that it has a negative reaction in the short run, which is mostly due to the direct effects of the reduction in production growth and also the reverse effects of the growth of the prices on the economic security index. In the long run, the gradual decrease in inflation leads to the improvement of the economic security index. To summarize the degree of importance and the degree of influence of each variable, analysis of the variance of the prediction error of the production growth variable was used. The results of this study show that both in the short run and in the long run, the most important variable influencing changes in production growth is the impulse of the economic security index, which is very important for the stability of economic conditions, whether the absence or reduction of unemployment risks, the risk of growth of health costs. And private treatment shows the risk of poverty and risks caused by inflationary uncertainties. The results of the analysis of the variance of the prediction error of the economic security index variable also show, the most important factors explaining the changes in the country's economic security are different in the short and long run. According to the specified model, in the short run, changes in production growth and inflation cause more than half of the changes in the economic security index. But in the long run, their effects will decrease and the growth momentum of liquidity is able to explain about 10% of the changes in the economic security index. Therefore, the effect of the contractionary impulse of the growth of liquidity through reducing inflation and promoting the growth of GDP in the long run has a positive effect on the country's economic security index. According to the results obtained from the analysis of research results regarding Iran, inflation control policies are recommended despite its adverse effects on production levels in the short-term, taking into account the long-term positive effects on the security index and economic growth. and follow up policy makers.

Keywords

Iran; Economic growth; Economic Security; Cpi; M2

References

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