Inflation Targeting in Iranian Economy: Investigation Prerequisites Regarding Monetary Transmission Mechanism

Abstract

Inflation targeting as an monetary policy framework, requiring some prerequisites to warrant its prosperity. This research tends to investigate the applicability of inflation targeting to Iranian economy. Our findings on the existence of potential monetary policy instruments in order to control the inflation indicate that exchange rate can be used in short term, but the over-emphasis and over dependency on it, is not suggested in inflation targeting. Deposit rates are officially determined not based on economic conditions, and had negligible effect on economic variables, so using the deposit's rates as an instrument to control the inflation is impossible. The effects of money supply on the price level in the short- term is low, in the mid-term is moderate, and its maximum effect revealing in the long- term; thus the money supply cannot be used as a very effective instrument of monetary policy, for the proper time horizon in inflation targeting framework is approximately two years.

Keywords

• inflation targeting
• monetary transmission mechanism
• monetary policy instruments
• iranian economy