Economic Stability and the Central Bank: Rule or Discretion

Zangeneh, Hamid (2006): Economic Stability and the Central Bank: Rule or Discretion. Published in: Iranian Economic review , Vol. 11, No. 16 (2006): pp. 165-175.

Abstract

The history of monetary policy in Iran, judging by their performance in keeping the value of the currency, maintaining a steady growth in the Gross Domestic Product, faltering investment, show that monetary policy has not been a portrait of consistent successes, to say the least. It has been employed in an on-again-off-again manner rather than as a tool for proactive decision making. In this paper the author shows the simulation results for the GDP growth under a regime of fixed monetary rule under different assumptions Comparing the historical changes in the monetary base with a policy rule would highlight the benefits of a response rule. One could see wider fluctuations in the monetary base compare to what was warranted according to the response function. They also show that in most of the cases, monetary base moved the opposite of what should have been done according to the response function. That is, in most years, they reduced the money supply when they should have increased it and increased the money supply when they should have decreased it. At times, it seems that they made a wrong monetary policy and the next year, found their mistake and over compensated for the mistake by overshooting or undershooting.

• Item Type: MPRA Paper
• Language: English
• Keywords: Monetary rules v. discretion; Monetary policy, Response function, GDP growth and monetary stability
• Subjects: E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy

References

Armor, Jamie, and Agathe Côte, "Feedback Rules for Inflation Control: An Overview of Recent Literature," Bank of Canada Review, pp. 43-54, Winter 1999-2000.

Bryant, R. C., Peter Hooper, and Catherine L. Mann, Evaluating Policy Regimes, The Brookings Institution, Washington, DC, 1993.

Dueker, Mickael J., and Andreas M. Fisher, "A Guide to Nominal Feedback Rules and Their Use for Monetary Policy," Federal Reserve Bank of St. Louis Review, pp. 55-63, July/ August 1998.

Choi, Jae-Young and Ratti, R., " The Predictive Power of Alternative Indicators of Monetary Policy," Journal of Macroeconomics, fall 2000, Vol. 22 no. 4, pp. 581-610.

Cukierman, Alex, Central Bank Strategy, Credibility, and Independence: Theory and Evidence, Cambridge, Massachusetts, MIT Press, 1992.

Falls, G. A. and Hamid Zangeneh, "Interest Volatility and the Demand for Money: The Empirical Evidence", Quarterly Journal of Business and Economics, winter 1989, 26-42.

Falls, G. A. and Hamid Zangeneh, "An Open Economy Approach to U.S. Demand for Money", The Journal of Economics, Vol. XII, 1986, 82-86.

Freedman, Charles, "Inflation Targeting and the Economy: Lessons from Canada's First Decade," Contemporary Economic Policy, Vol. 19, No. 1, pp. 2-19, January 2001.

____________, "Monetary Policy: Theory and Practice," Journal of Money, Credit, and Banking, Vol. 14, No. 1, pp. 361-81, February 1982.

Friedman, Milton, "A Monetary and Fiscal Policy Framework for Economic Stability," American Economic Review, 38:245-264, 1948.

____________, A Program for Monetary Stability, Fordham University Press, 1960.

Friedman, Benjamin M., "The Inefficiency of Short-Run Monetary Targets for Monetary Policy," Brookings Papers on Economic Activity 2, pp. 293-355, (1997)

Gali, Jordi, " How well Does the IS-LM Model Fits Postwar US Data," Quarterly Journal of Economics, 107, pp. 709-38, May 1992.

Goldfeld, Stephen M. " The Demand for Money Revisited." Brookings Papers on Economic Activity, No. 1 (1973), 577-638.

Goldfeld, Stephen M. " The Case of the Missing Money." Brookings Papers on Economic Activity, No. 3 (1976), 683-730.

Hamburger, M., "The Lags in the Effect of Monetary Policy - A Survey of Recent Literature," Federal Reserve Bank of New York, 1971.

Hamburger, M. J., "Recent Velocity Behavior, The Demand for Money, and Monetary Policy", conference on Monetary Targeting and Velocity, Federal Reserve Bank of San Francisco, 1983.

Hetzel, Robert L. " The October 1979 Regime of Monetary Control and the Behavior of the Money Supply in 1980." Journal of Money, Credit and Banking 14 (May 1982), 234-51.

Howrey, E. P., Distributed Lags and the Effectiveness of Monetary Policy: Note," American Economic Review, 59 (1969), 997-1001.

Kydland, F. E. and Prescott, E. C., Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, Vol. 85, no. 3, pp. 473-491, 1977.

Laidler, David E.W., The Demand for Money: Theories and Evidence. 3rd ed. Harper & Row, Publishers, New York, 1985.

Laidler, David E.W., "The Demand for Money in the United States- Yet again" in On the State of Macroeconomics, edited by Karl Brunner and Allan Meltzer, Carnegie - Rochester Conference Series on Public Policy, Vol. 12, Amsterdam, North Holland, 1980, pp. 219-71.

Maxfield, Sylvia, Gatekeepers of Growth: The International Political Economy of Central Banking in Developing Countries, Princeton University Press, 1997.

McCallum, B.T., "Robustness Properties of a Rule for Monetary Policy," Carnegie-Rochester Series on Public Policy, 29 (1988) 173-204.

23. McCallum, B.T, and Nelson, E., Nominal Income Targeting in an Open-Economy Optimization Model," Journal of Monetary Economics, 43 ((1999), 553-578.

24. Moore, B. J., "Optimal Monetary Policy," Journal of Political Economy, 71 (1963), 280-83.

25. Stark, Tom, and Dean Croushore, "Evaluating McCallum's Rule When Monetary Policy Matters, Journal of Macroeconomics, Vol. 20, No. 3, pp. 451-85, Summer 1998.

26. Stuart, Alison, "Simple Monetary Policy Rules," pp. 281-87.

27. Simon, H. C., "Rules versus Authorities in Monetary Policy," Journal of Political Economy, 1936.

28. Svensson, Lars E. O., "Inflation Targeting as a Monetary Policy Rule, "Journal of Monetary Economics, 43 (1999) 607-654.

29. Tanner, J. E., "Lags in the Effects of Monetary Policy: A Statistical Investigation," American Economic Review, 59 (1969), 794-805.

30. Taylor, Herb., "PSTAR+: A Small Macro Model for Policymakers," Federal Reserve Bank of Philadelphia Working Paper, 92-96, December 1992.

31. Taylor, Jon B., "Discretion versus Policy Rules in Practice," Carnegie-Rochester Series on Public Policy, Vol. 30, pp. 195-214, November 1993.

32. 14. Meltzer, Allan, "The Demand for Money: The Evidence from the Time Series", Journal of Political Economy 71, June 1963, pp. 219-46.