Editorial
The defining feature of today’s economic environment is not simply uncertainty, but the speed at which conditions can change. Policymakers are no longer dealing with trends that evolve over months or even weeks; developments can now shift within hours. This reality has fundamentally altered the landscape for monetary policy.
In the years following the nuclear agreement, relative stability allowed Iranian policymakers to model macroeconomic trends with a reasonable degree of confidence. Even after the return of sanctions, economic forecasting remained possible within shorter horizons. Today, however, uncertainty itself has become the core characteristic of the economy. For a central bank—an institution whose very purpose is to preserve stability—this creates an exceptionally difficult dilemma.
The central question is therefore not only what policymakers should do, but what they must avoid doing.
Old Lesson
One of the oldest lessons in central banking is that monetary authorities should resist rushing into action after a negative supply shock. In demand-driven crises, economic textbooks emphasize rapid intervention and preemptive policy responses. Supply shocks are different. When production capacity is disrupted, the economy experiences the worst of both worlds simultaneously: weaker growth and higher inflation.
Under such conditions, every policy move involves painful tradeoffs. If the central bank prioritizes growth, inflationary pressures intensify. If it aggressively targets inflation, economic contraction deepens. This is precisely why the list of “don’ts” becomes far longer during periods of severe disruption.
In times of conflict or crisis, governments, businesses and households all expect the central bank to provide relief. Yet monetary authorities are not a source of real capital capable of rebuilding damaged productive capacity. Nor can they permanently replace businesses by financing wages and operating costs. Attempting to assume these roles risks creating far more dangerous outcomes—including monetary instability that could ultimately harm the entire economy.
That does not mean the central bank should remain passive indefinitely. Supply shocks eventually spill into the demand side of the economy through expectations. Once households and firms begin adjusting behavior to higher prices, inflation risks becoming entrenched. At that stage, policymakers must prevent excessive monetary expansion and close channels that could fuel persistent inflationary dynamics.
In other words, an aggressive anti-inflation stance may not be feasible at the onset of a shock. But after a period of adjustment, controlling inflation expectations becomes unavoidable. If the inflationary engine is not contained early enough, the result can be deeply destructive for both economic stability and public welfare.
Managing Expectations
The immediate responsibility of the central bank, however, lies elsewhere: preserving the functioning of the financial system.
Maintaining payment infrastructure is critical, particularly when both physical and cyber disruptions are possible. Measures aimed at facilitating transactions, expanding liquidity access and reducing payment bottlenecks become essential under such circumstances. In crisis conditions, the smoother the payment system functions, the lower the risk of panic and disorder.
Financial stability must also extend across broader asset markets. Temporary market closures may occasionally be necessary, but only for very short periods. Once people begin to believe their assets have lost liquidity, the psychological damage can spread rapidly across markets and threaten systemic stability far more severely than declining asset prices themselves.
Currency management presents another challenge. During periods of conflict, demand for foreign exchange often weakens initially, creating temporary stability in the currency market. Over time, however, demand can return—particularly if geopolitical tensions ease or a durable ceasefire emerges. Policymakers therefore need to focus on preserving foreign-exchange reserves while avoiding unnecessary interventions.
Equally important is avoiding ineffective capital controls and excessive administrative restrictions on trade settlements. Such measures have historically produced limited results while increasing economic friction. In an environment where commerce already faces extraordinary obstacles, reducing bureaucratic barriers and allowing markets greater operational flexibility becomes even more important.
Ultimately, credibility may be the central bank’s most valuable asset. Transparent communication, realistic assessments and honest engagement with market participants can strengthen trust even during periods of acute instability. In economies facing elevated uncertainty, managing expectations is not a secondary task—it is the front line in preventing a slide toward uncontrolled inflation and deeper financial disorder.
