The impact of monetary disorders on inflation and business cycles in Iran’s economy

M. Nazari Samani; E. Asadi

M. Nazari Samani Department of Economics, Khomeini Shahr Branch, Islamic Azad University, Isfahan, Iran
E. Asadi Department of Economics, Shiraz Branch, Islamic Azad University, Shiraz, Iran

Keywords: Monetary policy uncertainty, liquidity growth, business cycles, GARCH models, impulse response function.

Abstract

In this paper, we have investigated the effect of monetary disorders on inflation and business cycles in Iran’s economy during the period 1973 to 2012. Monetary disorders are defined by two indexes of monetary policy uncertainty and shock to liquidity growth. In the first step, the causal relationship of monetary policy uncertainty on real GDP fluctuations, employment fluctuations and inflation are estimated using Granger causality test. To this purpose, to follow Haghighat and Mohammad Gholipour Tapeh (2014), the conditional variance of liquidity growth extracted from models of GARCH family was applied as a substitute for monetary policy uncertainty. In the second stage, the reaction of economic growth, employment growth and inflation to the shock to liquidity growth are estimated using impulse response function technique derived from VAR model. The results indicate the existence of one-way Granger causality relation of monetary policy uncertainty in all three variables of real GDP fluctuations, employment fluctuations and inflation. Also, based on the results, impulse response function reduces the shock to liquidity growth as much as a standard deviation, real GDP growth and employment after a period and increases inflation. Accordingly, the hypothesis of the effect of monetary disorders on business cycles in Iran’s economy in the period of this research cannot be rejected.
JEL classification: E23, E31, E32, E52

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Author Biographies

M. Nazari Samani, Department of Economics, Khomeini Shahr Branch, Islamic Azad University, Isfahan, Iran

Department of Economics, Khomeini Shahr Branch, Islamic Azad University, Isfahan, Iran

E. Asadi, Department of Economics, Shiraz Branch, Islamic Azad University, Shiraz, Iran

Department of Economics, Shiraz Branch, Islamic Azad University, Shiraz, Iran

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