پژوهشهای اقتصادی (Sep 2024)
Threshold Effects, Sacrifice Ratio and Government Debt The Smooth Transition Regression Approach
Abstract
Introduction The significance of inflation in the economic system and the production reduction or loss resulted from an anti-inflation policy as an integral part of inflation control policies, should never be underrated. It is critically important to study the sacrifice ratio and influencing factors which measure the accumulated losses in real production as a result of one percent permanent reduction in the inflation. It is considered as a criterion which makes it possible to somehow evaluate the effects of inflation control policies imposed by the central bank. Therefore, in the present research, the factors influencing the sacrifice ratio are identified by emphasizing the government debt in Iran and using seasonal data (1997-2021). Methodology In order to achieve the goal of the research, the following relationship is considered: SRt=β0+β1(DebtGdp)t+β2Opent+β3Speedt +β4Transt+β5Itt+εt (1) SRt : The sacrifice ratio is equal to the cumulative amount of the reaction of economic growth to the monetary shock, while the denominator only shows the final effect of the change in inflation as a result of a monetary shock. This ratio is calculated as follows: SR=S=0T∂yt+s∂εm1∂t+T∂εmt (2) Itt : Inflation targeting is defined as an optimal monetary policy. The optimal monetary policy is obtained by minimizing the social loss function according to the constraints of the monetary transmission mechanism. The inflation targeting policy is calculated as follows: πt*=πt+yt-y+et-et-1 (3) πt,πt* are inflation rate and target inflation rate respectively, (yt-y) is the deviation of the product from its potential level, et is the exchange rate (dollar price of the country's currency). (DebtGdp)t : The ratio of debt to GDP for governments shows their ability to repay their existing loans and repay the loans they will receive. Opent : The degree of trade openness is defined as the ratio of total exports and imports to GDP and reflects economic development and diversity. Speedt : The speed of deflation is equal to the ratio of the total amount of deflation to the length of time during which inflation has decreased. Transt : The instrument of monetary policy is more transparent, which can reveal the actions of the monetary policy maker better and faster to the public. The index defined for transparency was considered as the following relationship: TIBLt =110 -1INFibound-INFt if INFt =INFt* if INFilower-boundt Fiupper-boundif INFt ≥INFiupper-bound or INFt ≤INFilower-bound (4) INFi consumer price index, INFt* monthly inflation, INFibound time interval of inflation in each year, INFi* inflation was considered and calculated and the past transparency index. When transparency is high, this index is equal to one, and if inflation is very high and in other words, transparency is very low, the index above will be equal to zero. To achieve the goal of this research, the Smooth Transition Regression Model (STR) is used. Findings The results obtained from the estimation of the model indicate that (DebtGdp)t-1 is the transition variable of the sacrifice ratio function. So that when (DebtGdp)t-1 reaches the threshold of 0.817, the function of the sacrifice ratio enters the second limit regime. The results indicate that (DebtGdp)t and Opent in both regimes have a positive effect on the sacrifice ratio and this effect is strengthened in the second regime. In the second regime, the Speedt also had a positive effect on the sacrifice ratio. Also, Transt and Itt have had a negative effect on the sacrifice ratio in both regimes, but this effect has been strengthened in the second regime. Discussion and Conclusion In relation to the positive effect of (DebtGdp)t on the sacrifice ratio, it can be said that an increase in government debt increases the wealth of bond holders, provided that other wealth items are constant, so the price of long-term bonds increases. The total demand and price level increase at the same time. In this case, the supply of money, which is endogenous and a function of the demand and the amount of government debt, increases in accordance with the demand for money. In this case, the price level, which is the balancing factor of the future nominal value of discounted wealth and the nominal value of public debt, increases. Therefore, the cost of deflationary policies has increased and ultimately leads to an increase in the sacrifice ratio. Expansionary monetary policy can lead to excess demand in the economy and thus cause an increase in the general level of prices, and the pressure to increase prices can be reduced through imports and thus by changes in the balance of payments. In fact, trade openness may shift some of the inflationary pressure to the balance of payments, resulting in lower average increases in the general price level. The positive effect of increasing speed of reducing inflation, in the second regime has led to an increase in the sacrifice ratio. In general, the improvement in the transparency index will be effective in reducing the sacrifice ratio. In case of transparency in Central Bank data, it could be potentially considered as one of the key tools in the field of monetary policy management. In fact, the transparency of information will lead to an increase in the commitment of Central Bank in dealing with inflation. It could also control inflation and ultimately lead to a reduction in the cost of deflationary policies, and sacrifice ratio decrease. Inflation targeting by means of public announcement of official quantitative targets for the rate of inflation over one or more times horizons could be considered as a workable policy. By explicit declarations, low and stable inflation will be assumed as the main goal of monetary policy in the long run. Inflation targeting minimizes the motivation of Central Bank to show opportunistic behavior and this may increase the credibility of this regulatory institution in the loner term. Subsequently, the general public will adjust their inflation expectations in a fast state and therefore the costs of deflationary policies will decrease in return.
