Investigating the relationship and coordination between monetary and financial policies in the Iranian economy using the New Keynesian DSGE model

Purpose: Validity of a policy to achieve the goal of sustainability is an important issue. Stability of expectations through monetary policy is successful when financial policies do not make expectations unstable. The coordination between monetary and financial policies is done at two different levels, firstly in the short term and in accordance with the conventional performance of monetary and financial policies, and secondly regarding the long-term effects of macroeconomics, which can affect the coordination of unadjusted policies. In the short term, coordination is a policy to achieve financial goals, including price stability. The main focus should be placed on monetary policies and government debt management. In the long term, the issue of policy coordination is adjusted based on how to design the structure of monetary and financial policies, which leads to maintaining the path of economic growth in a balanced way; that is, it controls inflation and provides financial conditions for sustainable growth. This indicates that the financial deficit should be limited to such an extent that the capital market can operate without disturbing the allocation of resources in the economy and bringing the need for the central bank. Considering the continuous budget deficit, one of the most important economic challenges in Iran is the dependence of the government budget on oil, because the more the dependence of the government budget on oil revenues and its influence on oil impulses, the more fluctuations in the demand of the entire economy. The importance of the mentioned issue stems from the fact that increasing government spending has been one of the ways to achieve greater economic growth in recent decades, but this has caused governments to face the problem of continuous budget deficits. On the one hand, the government's income has serious limitations due to the weakness of the tax system and some economic structural problems. On the other hand, the adoption of incorrect financial policies and lack of proper planning along with population growth lead to an increase in demand for public goods such as education and health. This has led to the increasing growth of government expenditures. The limitation of the government's resources and incomes causes a budget deficit, making governments borrow from the central bank to cover this deficit. The monetary authorities' reaction to this issue can be effective in the stability of economic policies.
Methodology: Monetary and financial policies have always been of interest to economists as tools to achieve macroeconomic goals. Of course, there have been fluctuations in focusing on the positive role of each of the economic policies in stabilizing economic fluctuations. The main goal of this research was to examine the relationship and coordination between monetary and financial policies in Iran's economy. For this purpose, the statistical information of the period 1989-2022 was used based on the frequency of the seasonal data. In order to model the interaction and relationship between monetary and financial policies in Iran, the Dynamic Stochastic General Equilibrium (DSGE) model was used.
Findings and discussion: Based on the results, the shock of monetary policies initially has a very decreasing effect on economic growth and consumption. From the fourth period onwards, however, the impact of monetary policy shocks on these two variables is positive. This can be due to the existence of unsupported monetary policies in the country and the resulting increase in inflation, which has a negative impact on consumption and economic growth. As a result of the monetary policy shock, the net investment increases sharply at first and reaches a maximum in the fourth period and then decreases with a downward trend. Therefore, due to the effects of inflation, monetary policies lead to the desire of households and companies to increase investment. In the case of government spending, the monetary policy shock increased the government spending sharply at first and, after six periods, it went through a relatively downward trend with a gentle trend. According to the results, financial policy shocks have first led to an increase in consumption and economic growth and finally to a decrease. As a result of the financial policy shock, the net investment decreases sharply until the sixth period and reaches zero. After that, it increases mildly. Also, in response to the financial policy shock, there is an increase in the inflation rate and the amount of money in response to the financial policy shock. This indicates the supremacy of financial policy over monetary policy in the country.
Conclusions and policy implications: In Iran, monetary and financial policies are always implemented by policymakers with the aim of creating economic growth and stability. But, unfortunately, there is always the issue of deviation from the goals and the undesirable and negative welfare and economic effects of applying such policies. It seems that most of these issues are due to paying attention to monetary and financial goals separately rather than dealing with the interactions of those policies and, most importantly, recognizing the goal of preparing executive programs for these two areas. On the other hand, the dominance of financial policy and lack of attention to monetary and financial policy interactions have limited the power of the central bank to use monetary instruments to control inflation. It is necessary to study the interaction of monetary and financial policies, both from the point of view of economic considerations and with regard to the requirements of revising the implementation of those policies in terms of the negative effects on the economy caused by the implementation of wrong policies in the economy of Iran. According to the results, it is suggested to control the inflation rate and money growth in the country with the financial discipline of the government and the reduction of financing the government expenses from the area of money creation. In the end, non-violation of the announced policies by the policy makers will be the most important factor in reducing the financial indiscipline of the government.