Dissertation
To obtain the degree of Master of Economic Sciences
1388
Abstract
Economic schools have different theories regarding the effect of monetary policies on the real variables of the economy. But all of them confirm the existence of a positive relationship between the volume of money and inflation.
It is based on this difference of opinion that the classical and neoclassical schools, believing in the neutrality of money, reject the implementation of monetary policies by the government and do not consider the government's intervention in the economy permissible. On the other hand, the Keynesian school, relying on the effect of this type of policy, believes in the necessity of government intervention in the economy.
In this thesis, using the TSLS simultaneous regression model, the effect of the increase in the volume of money on the three variables of production, price and exchange rate is investigated.
The final result of the research indicates that the increase in the volume of money has a positive effect on production, price and exchange rate. An increase in the amount of money causes an increase in the price level rather than increasing the production. As a result, it can be said that the increase in the amount of money has a major effect on the price level. Based on this, it is recommended that policymakers use this policy to control inflation.
Keyword: neutralization of money Monetary policy / volume of money / production / price / exchange rate / TSLS
Chapter One
Research generalities
Research problem:
A) The effect of monetary policy on real production and the general level of prices:
After the Second World War, the spread of Keynes' view on the effectiveness of monetary and financial policies in The creation of employment and economic growth created a general desire among the countries of the world to apply voluntary policies on the demand side, and before the 70s or even the 80s, the public opinion was in favor of the government's intervention in the economy through the application of policies on the demand side. And different views were almost without exception based on the centrality of the Phillips curve. These policies achieved brilliant results in the 1950s and 1960s, but the continuation of government intervention in the following decades brought opposite results and the average global growth decreased after the 1960s, but the average global inflation rate increased during the same period. In the 1970s, an oil shock hit the supply side of the economy, which caused the inflation rate to increase in almost all countries and the average economic growth rate to decrease. Since the beginning of the 90s, most countries in the world have tended to a regime of low inflation rates in order to get rid of financial problems and stabilize economic conditions. In countries whose policies were aimed mainly at controlling the inflation rate, the crisis ended in a favorable way, and in countries where inflation control was not on the agenda of their governments, inflation became a chronic phenomenon that affected their economy for years. One of the consequences of this phenomenon was the decline of the average economic growth rate. In addition, it seems that pursuing the strategy of accelerated growth through stimulating production by demand-side policies, in addition to destabilizing the financial situation of developing countries, has also changed the coefficient of separation of its effects on real production and the increase in the general price level to the detriment of real production. Phillips relationship, in general, considers the existence of a causal relationship between the inflation rate (or the general price level) and production growth (production level) either rejected or in accordance with Keynesian approach draws such a relationship, if it exists, as a direct relationship between economic growth and inflation. In order to achieve economic growth, it is necessary to bear some amount of inflation. But there are evidences that indicate a significant decrease in the rate of economic growth in countries that have inflation rates above 10-15%. One of the reasons is that the high levels of the inflation rate increase the depreciation cost of the capital unit so much that it requires an increasing rate for alternative investment, otherwise the growth horizon becomes more and more limited. This point of view, which indicates the existence of an inverse causal relationship from the inflation rate to economic growth, is getting more and more attention day by day. [1]
Increasing the inflation rate from an acceptable level will be accompanied by a decrease in the production capacity of the economy. In countries with a relatively high inflation rate, separating the effects of expansionary policies on the demand side will be detrimental to economic growth. Constant changes in the general price level make it difficult for economic agents to extract price implications, increase uncertainty in society, and disrupt investment activities.Instability and uncertainty have negative effects. Increasing the risk of production activities increases the effective interest rate and shortens the maturity of loans. Planning horizons have shortened and long-term and costly industrial investment, which has high expected profit, will be stopped due to brokers' uncertainty.
Friedman considers one of the reasons for the negative effect of inflation on economic growth to be the wrong form of government intervention. Governments are very sensitive in dealing with inflation and want to deal with it as quickly as possible, which causes Weakening market forces and reducing efficiency. Or they turn to pricing and price control because they are unable to determine or control the price of all goods, the ratio of prices changes and in the long term neither the general price level is adjusted nor the goals of social justice are achieved.
In general, monetary and financial policies are applied with the aim of changing the equilibrium amounts of production and the general price level in the short term, and the question is what part of the effect of these policies will affect production and what part of it will affect the general price level became, It is extremely important for the policy maker.
In Iran, with data from 1338 to 1374, it has been estimated that for every 1% increase in nominal demand, 0.3% of it is manifested as an increase in production and the rest as an increase in the general price level. Inflation can be expected to be more effective for demand-side policies.
In Iran, due to the rich income of oil and gas, the government is the main factor and driver of economic growth, capital formation and the introduction of new technology in the production structure, and in general, the main factor influencing the allocation of resources in the country's economy. But in the long term, these command mechanisms cannot make a noticeable change in the demand components of the entire economy. The higher the rate of
inflation in the conditions of economic instability, the production growth rate shows a negative reaction.
The results of research[3] show that monetary policies in Iran do not have a positive effect on economic growth and these policies should be applied with the aim of controlling the general level of prices. In our country, monetary policy has become an ineffective tool for economic management.
b) The impact of monetary policy on the exchange rate:
In the 1970s, inflation was ranked among the most acute economic problems of different countries. Also, the exchange rate stood out more and more as a key and important factor in economic policies, and the effect and effectiveness of exchange rate fluctuations and inflation were investigated and empirically analyzed.
Due to the importance of the exchange rate as an important price in an open economy, the economics of the exchange rate has become one of the broad fields of research. This price affects many government policies and decisions of other economic factors. One of the relatively new topics in exchange rate literature is the role of new information in short-term and medium-term exchange rate changes. This theory, which is one of the results of the rational expectations hypothesis, states that unexpected events or new information can affect the price of the exchange rate. The general results of empirical studies in this regard also confirm the effect of monetary and real shocks on the exchange rate trend.[4] Such shocks (such as unexpected changes in variables such as money supply, real income, current account, interest rate, price level, etc.) which are not present in the information set of economic factors of the foreign exchange market at the time of formation of long-term exchange rate expectations, cause the exchange rate to deviate from its expected value. The noteworthy point is that exchange rate fluctuations in the short and medium term can affect the way of adjusting the exchange rate to the long-term equilibrium path. Therefore, the stronger and more permanent the effect of unexpected shocks, the more likely it is that the exchange rate will not return to the long-term equilibrium path. Therefore, it is clear that the government's main effort to achieve stability in the exchange rate trend and move in the long-term equilibrium path, in the use of policy tools such as monetary policies, should be in such a way that these policies are considered as economic stabilization policies and strongly prevent the creation of unpredictable disturbances.