Inflation-targeting exchange rate policy for an oil producing country

the case of Iran

Mehdi Sadeghi, Husain Samsami, Nasser Sherafat

Research output: Contribution to journalArticle

Abstract

The Iranian economy is suffering from a high inflation rate mainly caused by its current monetary policy. The present study argues in favour of an inflation-targeting monetary policy and develops an exchange rate model that is consistent with this new policy direction. In the first stage of this study, we estimate the zero-inflation exchange rate, or the reference exchange rate. Then, we apply an ARDL co-integration approach to estimate the long-term relationship between the inflation rate and the deviation of the official rate from the reference rate (ERD). Results indicate that 1% change in ERD has 0.10% positive impact on the inflation rate. Other explanatory variables included in this model, such as excess money supply and oil revenue, also, influence the inflation rate. Estimated coefficients are statistically significant at the 1% level.
Original languageEnglish
Pages (from-to)80-97
Number of pages18
JournalInternational research journal of finance and economics
Issue number12
Publication statusPublished - 2007

Keywords

  • inflation targeting
  • exchange rate model
  • ARDL model
  • Iran
  • oil revenue

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