Leader of the Islamic Revolution Ayatollah Seyyed Ali Khamenei has named the new Iranian year (started March 21) as “Inflation Control and Production Growth”, which is expected to be at the forefront of all the decisions and efforts of the three branches of power this year.
Theoretically, the realization of each of these goals in the short run and in an unbalanced economy requires special mechanism. The containment of inflation requires the application of contractionary economic policies while production growth requires the implementation of expansionary policies which, given the time-consuming process of production, leads to an increase in prices and inflation. This was stated by Hossein Bazmohammadi, an economic expert, in a write-up for the Persian daily Donya-e-Eqtesad. A translation of the text follows:
The use of different tools and mechanisms separates the short-term decision-making (legislative and executive branches) from the society’s long-term well-being, and highlights the choice between short-term popularity during an administration’s term in office and a reputable record.
Since policymakers and executives (representatives of the parliament and the government respectively) generally opt for short-term popularity, this is one of the most important arguments in support of the institutional and operational independence of the central bank whose legal and main responsibility is to maintain the value of the national currency.
Inflation-targeting strategy is a new policy framework that gradually gained popularity among central banks in the early 1990s. In this framework, the short-term operational goal of central banks is the interest rate (profit) of the interbank market.
Central banks manage the short-term interest rate of the interbank market within a channel of floor and ceiling rates around the policy interest rate, expectations, aggregate demand, product level and inflation. The institutional requirements needed for the acceptance and successful implementation of the inflation-targeting strategy include the approval of laws and regulations, and the creation of a suitable organizational structure in the central bank.
Among the important prerequisites for accepting the inflation-targeting strategy are providing institutional and operational independence for the central bank legally and practically, adherence to financial discipline in the government budget, the existence of an efficient securities market with various financial instruments from short-term to very long-term maturities and financially-capable players with diverse investment strategies.
Although weakness in any of these prerequisites reduces the effectiveness of the central bank’s measures through monetary policy transmission mechanisms on macroeconomic variables, empirical findings indicate that even a weak central bank that has low public support can increase the transparency of its policy decisions by limiting discretionary actions in directing monetary policy by accepting the inflation-targeting framework.
According to statistics, more than 70 central banks from countries at various levels of development have employed inflation targeting at the beginning of 2023. Since the early 1990s, many countries have revised their central bank law, aiming for an increase in its independence, transparency and accountability. In a general assessment, the inflation rate has decreased in countries that have set price stability as the main goal of their central bank; the likelihood of achieving a higher economic growth rate has also increased in a stable environment.
Therefore, although in the short run, the realization of inflation control and production growth at the same time is difficult, according to the theoretical consensus and the successful experience of countries, it is possible that by emphasizing the achievement of a low and stable inflation rate (price stability), we’ll achieve higher economic growth in the country. Such a development will be possible by increasing internal and external political and economic stability in the country.
