Volume 28, Issue 2 (Summer 2023)
JPBUD 2023, 28(2): 45-89 |
Back to browse issues page
Download citation:
BibTeX | RIS | EndNote | Medlars | ProCite | Reference Manager | RefWorks
Send citation to:
BibTeX | RIS | EndNote | Medlars | ProCite | Reference Manager | RefWorks
Send citation to:
Jalali Naeini S A R, Seighalani S. (2023). External Shocks, Cost Push and Stagflation in Iran. JPBUD. 28(2), 45-89. doi:10.61186/jpbud.28.2.45
URL: http://jpbud.ir/article-1-2227-en.html
URL: http://jpbud.ir/article-1-2227-en.html
1- Department of Economics and Systems, Institute for Management and Planning Studies, Tehran, Iran , a.jalali@imps.ac.ir
2- Department of Economics and Systems, Institute for Management and Planning Studies, Tehran, Iran,
2- Department of Economics and Systems, Institute for Management and Planning Studies, Tehran, Iran,
Abstract: (817 Views)
Two major sources of inflationary forces in Iran's economy during the past three decades have been the exchange rate depreciation and soaring imported goods prices, and the imbalance between the nominal scale of the economy and its production capacity. In the period of 2012-2022, the main cause for exchange rate depreciation and the most important driver of cost upsurge was the international sanctions. In this period, the demand-side policies, specifically monetary policy, were reactive and could not restrain inflationary pressures emanating from the foreign shocks. In contrast, during the period 2001-2011, fiscal and monetary expansions led to aggregate demand expansion, however, due to the stability of the exchange rate and the supply chains, inflation remained relatively in check over the medium run. The stability of the nominal exchange rate also increased the demand for Rial as a financial asset thereby absorbing growth in M2. The average annual growth rate of M2 in the decade of sanctions (2012-2022) was two and a half percent higher than the previous decade, but the average annual inflation rate was nearly fourteen percent higher. After re-imposition of sanctions by the USA in 1998, the average annual inflation rate rose to above 42% and remained significantly higher than the long-term trend. According to the findings of this paper, the difference in output and inflation during the last two decades can be attributed to the occurrence of external shocks and their impact on the cost of production and on the supply chain.
Keywords: Inflationary Stagnation, Monetary Policy, DSGE Model, cost push inflation, Exchange Rate, Iran.
Type of Study: Research |
Subject:
Macroeconomics
Received: Jul 29 2023 | Accepted: Sep 09 2023 | ePublished: Oct 30 2023
Received: Jul 29 2023 | Accepted: Sep 09 2023 | ePublished: Oct 30 2023
References
1. Baharvand, N., Farzam, V., & Nademi, Y. (2018). Effect of Oil Shocks on Business Cycle in the Iran's Economic Using the Markov-Switching Model (1988: 2-2014: 4). The Journal of Economic Studies and Policies, 5(1), 3-22.
2. Brunner, K. (1987). Fiscal Policy in Macro Theory: A Survey and Evaluation. In R. W. Hafer (ed.), The Monetary versus Fiscal Policy Debate: Rowman & Allanheld.
3. Bruno, M. (1978). Exchange Rates, Import Costs, and Wage-Price Dynamics. Journal of Political Economy, 86(3), 379-403. [DOI:10.1086/260678]
4. Bruno, M. (1980). Import Prices and Stagflation in the Industrial Countries: A Cross-Section Analysis. The Economic Journal, 90(359), 479-492. [DOI:10.2307/2231921]
5. Bruno, M. (1984). External Shocks and Domestic Response: Israel's Macroeconomic Performance, 1965-1982: National Bureau of Economic Research, Working Paper, No. 1298. [DOI:10.3386/w1298]
6. Bruno, M., & Sachs, J. (1981). Supply Versus Demand Approaches to the Problem of Stagflation. Macroeconomic Policies for Growth and Stability (Institute fur Weltwittschaft, Kiel).
7. Di Pace, F., Juvenal, L., & Petrella, I. (2020). Terms-of-Trade Shocks are not all Alike. IMF Working Paper Series 2020/280. [DOI:10.5089/9781513563916.001]
8. Frankel, J. (2010). Monetary Policy in Emerging Markets. In Handbook of Monetary Economics (Vol. 3, pp. 1439-1520). Elsevier. [DOI:10.1016/B978-0-444-53454-5.00013-X]
9. Frankel, J. A., Vegh, C. A., & Vuletin, G. (2013). On Graduation from Fiscal Procyclicality. Journal of Development Economics, 100(1), 32-47. [DOI:10.1016/j.jdeveco.2012.07.001]
10. Friedman, M. (1970). A Theoretical Framework for Monetary Analysis. Journal of Political Economy, 78(2), 193-238. [DOI:10.1086/259623]
11. Friedman, M. (1982). Monetary Policy: Theory and Practice. Journal of Money, Credit and Banking, 14(1), 98-118. [DOI:10.2307/1991496]
12. Galesi, A., & Lombardi, M. J. (2009). External Shocks and International Inflation Linkages: A Global VAR Analysis. ECB Working Paper No. 1062. [DOI:10.2139/ssrn.1414192]
13. Gordon, R. J. (1988). Macroeconomics: Theory and Policy: McGraw-Hill.
14. Hallman, J. J., Porter, R. D., & Small, D. H. (1991). Is the Price Level Tied to the M2 Monetary Aggregate in the Long Run? The American Economic Review, 81(4), 841-858.
15. Hanson, J. A. (1985). Inflation and Imported Input Prices in Some Inflationary Latin American Economies. Journal of Development Economics, 18(2-3), 395-410. [DOI:10.1016/0304-3878(85)90064-1]
16. Jalali, A., & Zamanzadeh, H. (2016). The Effects of Liquidity Components on Output and Prices: A VECMX Approach. Journal of Monetary and Banking Research, 9(27), 1-27. [In Farsi]
17. Jalali-Naini, A. R., & Naderian, M. A. (2020). Financial Vulnerability, Fiscal Procyclicality and Inflation Targeting in Developing Commodity Exporting Economies. The Quarterly Review of Economics and Finance, 77(1), 84-97. [DOI:10.1016/j.qref.2020.01.001]
18. Laudati, D., & Pesaran, M. H. (2023). Identifying the Effects of Sanctions on the Iranian Economy using Newspaper Coverage. Journal of Applied Econometrics, 38(3), 271-294. [DOI:10.1002/jae.2947]
19. Lorenzoni, G., & Werning, I. (2023). Inflation is Conflict. National Bureau of Economic Research, Working Paper, No. 31099. [DOI:10.3386/w31099]
20. Lucas Jr, R. E. (1972). Expectations and the Neutrality of Money. Journal of Economic Theory, 4(2), 103-124. [DOI:10.1016/0022-0531(72)90142-1]
21. Mehrara, M., & Oskoui, K. N. (2007). The Sources of Macroeconomic Fluctuations in Oil Exporting Countries: A Comparative Study. Economic Modelling, 24(3), 365-379. [DOI:10.1016/j.econmod.2006.08.005]
22. Mendoza, E. G. (1995). The Terms of Trade, The Real Exchange Rate, and Economic Fluctuations. International Economic Review, 36(1), 101-137. [DOI:10.2307/2527429]
23. Rowthorn, R. E. (1977). Conflict, Inflation and Money. Cambridge Journal of Economics, 1(3), 215-239.
24. Seighalani, S., Jalali-Naini, S. A., & Khiabani, N. (2022). External Shocks, Exchange Rate Changes, and Intermediate Goods: Explanation of Stagflation in Iranian Economy. Planning and Budgeting, 27(2), 3-50. [In Farsi] [DOI:10.52547/jpbud.27.2.3]
25. Spinola, D. (2020). Uneven Development and the Balance of Payments Constrained Model: Terms of Trade, Economic Cycles, and Productivity Catching-Up. Structural Change and Economic Dynamics, 54(1), 220-232. [DOI:10.1016/j.strueco.2020.05.007]
26. Stockhammer, E. (2013). Why Have Wage Shares Fallen? An Analysis of the Determinants of Functional Income Distribution. In Wage-Led Growth: An Equitable Strategy for Economic Recovery (pp. 40-70). Springer. [DOI:10.1057/9781137357939_3]
27. Sunkel, O. (2016). Inflation in Chile: An Unorthodox Approach. ECLAC Thinking, Selected Texts (1948-1998). Santiago: ECLAC, 2016. p. 173-194.
28. Taylor, J. B. (1995). Macroeconomic Policy in a World Economy: from Econometric Design to Practical Operation: W. W. Norton & Company.
29. Wachter, S. M. (1979). Structuralism vs. Monetarism: Inflation in Chile. In Short-Term Macroeconomic Policy in Latin America (pp. 227-256). Ballinger.
| Rights and permissions | |
.jpg) |
This work is licensed under a Creative Commons Attribution 4.0 International License. |
