Monetary policies are one of the most important policy tools for improving economic
variables, including inflation and production. Monetary policy is currently a dynamic and
challenging field of economic sciences, theoretically and empirically. The views on the effect
of monetary policy on production vary from the ineffectiveness and neutrality of money in
the short and long term to the effectiveness of monetary policy and its effect on production in
the long term and even in the short term.
2. Review of the literature
Institutional aspects and their effect on economic variables and the economic performance of
different societies have been attracted by experts in the field since the 1980s and led to the
development and expansion of its literature in the 1990s. Moreover, the valuable works of
North and Coase, as well as, winning the Nobel Prize in Economic Sciences for their efforts
to introduce institutional analyses put forward institutionalism as one of the leading economic
theories. According to this literature, it can be stated that the same impulses and policies can
be followed by different reactions due to temporal and spatial differences in the institutional
environment in which they happened (Dehghan Monshadi, 2019).
2.1. The effect of governance on the effectiveness of policies
The new economic literature emphasizes the importance of institutions and governance
conditions in the economic development process and the performance of economic policies.
Governance has a long history and has been defined in different ways. It literally means
domination, ruling, and strategic government, but it means the activity of country
management and control of a company or organization in the Oxford English Dictionary
(Gholipoor, 2004).
3. Materials and methods
This research investigated the effect of variables on the effectiveness of monetary policy
using the model introduced by De Mendonça and Nascimento (2018), which is presented as
Relation (1).
(1)
where is the index obtained for the effectiveness of the monetary policy in the i th country in
the t th year, GGI is the index of good governance, and X is other economic variables affecting
the effectiveness of the monetary policy, such as the degree of openness of the economy, the
development of financial markets, and virtual variable of the existence of the inflation
targeting policy in the relevant country. In the years with the inflation targeting policy, the
value was set to 1, but it was 0 in other years. In addition, the GDP variable was included in
the model to include other variables affecting the effectiveness of monetary policy.
4. Results
The effectiveness index of monetary policy was calculated for the sample countries before
estimating the coefficients using the proposed approach. This research calculated the
effectiveness of monetary policy using the approach introduced by Krause and Rioja (2006).
In this approach, and were calculated for the selected countries in each year. The inflation
deviation was measured by the deviation of the consumer price index. Analysis of the
descriptive statistics for the research variables demonstrated that this index average for the
countries in the period under study was 2980.43 and the median equaled 1.48. It should be
noted that the lower the value of the index, the more effective the policy would be in the
reduction of inflation and production fluctuations. The highest and lowest index value was
873575.4 and -107.91, respectively. Jarque- Bera statistic and its significance level also
showed that the distribution of the variable is not normal.
5. Conclusion
As shown by the results of earlier studies and the present research, the process of selection,
decision-making, and performance of individuals and societies takes place within the
framework of institutions. Thus, their reaction to various phenomena, including economic
and monetary policies, depends on institutions. One of the major institutions is the
governance that affects economic variables with monetary and financial policies. Therefore,
the primary objective of this research was to determine the effect of governance quality on
the effectiveness of monetary policy. According to the results, improving the quality of
governance significantly reduced production and inflation fluctuations and enhanced the
effectiveness of monetary policy. Hence, it could be concluded that in societies with
favorable governance indicators, better and more complete implementation of laws and
regulations could be expected, and formal and informal obstacles to implement economic
policies are reduced. The results obtained from the estimation of coefficients indicated a
significant relationship between the inflation targeting policy and the increased effectiveness
of monetary policy. The existence of inflation-targeting policy and its obligation make the
central bank focus more on the main goals of monetary policy, which is to maintain the value
of the national currency and increase economic stability. Under such circumstances, the
policy-maker can have more authority in controlling inflation and production fluctuations
rather than other secondary goals, resulting in more success in controlling inflation and
production fluctuations. |
