Balance of Payments as a Monetary Phenomena: A Study within a Small Scale Structural Macroeconometric Model Framework

Document Type : Original Article


1 Department of Economics,Faculty of Economics and Political Science, Shahid Beheshti University

2 M.A in Economics


This paper examines the determinants of trade and inflation and validates the Monetary approach to the balance of payments in the Iranian Economy within a  structural macroeconometric model . The model is estimated by using time series data for the period 1338 to 1386 and with the aid of cointegration estimation technique. Dynamic simulation within the entire sample period is used to test the validity of the constructed model.
To asses the effects of monetary and fiscal policies, first a contractionary monetary policy is conducted through the 10% increase in the required reserve ratio. The comparison of simulation result by the base line indicates that the general price level decreases by 11.5% on the average in the following years. Also balance of payment improves by 30%. A contractionary monetary policy which is implemented by reducing bank debt to the central bank, generated the same results.
To see the effects of devaluation on inflation, and the balance of payments, the Rial-Dollar exchange rate is increased by 20%. The simulation results indicate that the general price level will increase by 7% and balance of payment improves by almost 20%.
In sum, our simulation results confirm the monetary approach to the balance of payments in Iran. Both contractionary monetary policy and devaluation affects the balance of payments. But contractionary policy is more favorable, because it reduces the general price level . 


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