Comparison of the Effect of External Shocks on Inflation in the Fixed and Managed Floating Exchange Rate Regimes in the Economy of Iran with the Dynamic Stochastic General Equilibrium Approach

Document Type : Research Paper

Authors

1 Assistant Professor Faculty of Economics and Political Sciences, Shahid Beheshti University

2 PHD student Faculty of Economics and Political Sciences, Shahid Beheshti University

3 Deputy Director General of Program and Budget Organization

10.22051/ieda.2024.46980.1415

Abstract

The purpose of this article is to identify the effects of external shocks including currency shocks and sanctions and monetary shock on inflation in two different currency regimes in Iran's economy during the years 1368 to 1401. Using the stochastic dynamic general equilibrium model with the new Keynesian approach, the effects of these shocks on inflation in managed fixed and floating currency regimes have been compared. The results show that currency shocks in both currency regimes lead to an increase in inflation, but in the fixed regime, this increase is less. Examining the results of the shock of international sanctions also shows that this shock increases inflation in the managed floating regime, but in the fixed regime due to the intervention of the central bank, this effect is less. Finally, examining the effect of monetary shocks shows that under both fixed and managed floating regimes, it has led to an increase in inflation, and this effect is more intense in the managed floating regime. Therefore, it can be concluded that in the fixed currency regime, the monetary authority has a higher ability to control inflationary fluctuations due to external shocks. Of course, it should be noted that one of the requirements for choosing a fixed currency regime is the central bank's access to sufficient foreign exchange reserves, which faces serious limitations in the conditions of sanctions..

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