Time-frequency Analysis of Monetary Policy Response to Output Gap and Inflation Deviation in Iranian Economy

Document Type : Original Article

Authors

1 Assistant Professor of Economics, Faculty of Management and Economics, University of Guilan, Rasht, Iran

2 Assistant Professor of Economics, Business and Economics School, Persian Gulf University, Boshehr, Iran

10.29252/jem.2023.232476.1850

Abstract

Modeling the behavior of policymakers and monetary authorities in relation to macroeconomic conditions is crucial for economists. Estimating the reaction function of monetary policy to the out gap and inflation gap has become one of the most important issues for this reason. In this regard, the current study used continuous wavelet transform and multiple coherence tools, partial coherence, partial phase difference, and partial wavelet gain to evaluate Iran's monetary policy in the time-frequency domain from 1988 to 2021. The results indicate that the reaction function of monetary policy in addressing the inflation gap has been inefficient, which reflects the central bank's lack of independence and the contagion of macroeconomic imbalances to the monetary base. If the short-run horizon and the years 2013-2014 were considered, a rule based, and counter-cyclical response was implemented. In other periods and years, it has been reported that monetary policy has no effect or is discretionary, resulting in an increase in inflation deviation. During the years 2000-2008 and 2013-2014, regular and stabilizing monetary policy was observed during business cycles with a horizon of more than eight years. In spite of this, the monetary policy has not been able to fulfill its mandate in the common horizon of business cycles (4-8 years), where the counter-cyclical reaction becomes more essential to the output gap.

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References

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