Key tools for controlling inflation in the Iranian economy

“One of the key factors in curbing inflation is the credibility of policymakers,” said one economist. In other words, merely announcing the target inflation rate range is not enough to reduce inflation.

In an interview with IBNA, Karim Islamlouian stated: “Research shows that the success rate of a monetary policymaker in a country to curb inflation and price stability depends on the credibility of the monetary policymaker.” According to studies, this credit has been damaged due to the behavior of governments in Iran for many years and unfortunately is not high enough.

He continued: “As a result, to rebuild it, we need to take measures such as improving institutional quality, but as some economists have said, the four factors of transparency, relative independence of the central bank, honest behavior of monetary policymakers and his experience in combating inflation are key factors.” Credit creation for the central bank is introduced.

Professor of Economics, Shiraz University, also pointed to the prevention of devaluation of the national currency, which is currently a very important factor in controlling inflation, said: “According to research conducted in Iran, the increase and instability of the exchange rate is one of the key factors in increasing It is inflation. It seems that in the current situation, if the central bank places the exchange rate targeting in a target area known as the target zone so that this range itself is adjustable, it can help stabilize the exchange rate.

He continued: “This targeting can also affect the formation of inflation expectations.” Of course, although an increase in the exchange rate in Iran will increase the rate of inflation, but research has shown that the credibility of policymakers in targeting inflation can in turn explain the behavior of the future exchange rate. In other words, people’s expectations about short-term and long-term inflation, which is itself influenced by the credibility of the monetary policy maker, can affect the exchange rate and increase the current inflation rate through this channel.

According to Islamlouian, now that the central bank’s goal has changed from total monetary to interest rates, one of the factors that can help build trust is to design and implement a flexible monetary policy rule based on interest rate targeting. In other words, one of the requirements for reducing inflation and gaining credit is that monetary policymakers avoid discretionary behavior and follow a flexible monetary rule in these circumstances. Of course, gaining people’s trust can reduce the expected inflation rate and consequently inflation bias.

“If the monetary policymaker can prove to the people and economic actors that he adheres to his declared policy rule, he will play an important role in reducing inflation and price stability by increasing trust between society and the monetary policymaker,” he said.

Islamlouian added: “The movement that the Central Bank of Iran has already started by announcing its inflation targets should increase its relationship with the people by” explaining plans and goals “,” collective persuasion “,” increasing accountability and transparency “and” also committing to a The “flexible rule” should be completed to gradually restore some confidence in the monetary policy that has been lost over the years.

He also stressed that increasing production has a key role in reducing inflation: “In this regard, government assistance to the central bank to reduce inflation can be done by eliminating production bottlenecks and improving the business environment by ministries and government agencies.” Of course, the special role of the banking network can also be very helpful in this regard.

The economist stressed that in order to reduce inflation, or at least prevent it from rising further, it is very important for the government to cover its budget deficit in the face of coronation and sanctions through methods such as issuing bonds and not borrowing from the central bank. Of course, this does not mean that the issuance of bonds is economically and politically free, but its destructive effect on the economy is less than borrowing from the central bank and creating inflation in this way.

Islamlouian continued: “Another way to reduce the inflation rate and bring it closer to the targeted rate is to prevent the government from withdrawing resources from the National Development Fund, which are not available, and therefore at least in the short term until these resources They are imprisoned abroad. It acts like a loan from the central bank and increases the monetary base. In this regard, one of the important tasks of the government is to help release these resources and transfer them to the country, which can be effective in reducing inflation and exchange rates.

According to him, another point that can help reduce inflation is political stability and the avoidance of internal tensions. Undoubtedly, political instability and tensions within any country can lead to increased economic uncertainty, resulting in reduced investment and production, and rising and volatile prices.

“Increasing productivity will definitely reduce inflation,” says a professor of economics at Shiraz University. But this policy is time consuming and has an effect in the long run and has little effect in the short term.

In the end, Islamlouian said: “All these points need a platform that should be provided through improving the quality of institutions and social infrastructure in the country so that it can reduce inflation and increase production along with reducing poverty in the country.”