Abstract
Inflation targeting in various forms has been adopted by a number of countries as a framework for making monetary policy more coherent and transparent and for increasing the credibility of monetary policy. Despite the language, referring to inflation target as the primary objective of monetary policy, central bankers always make room for short-run stabilization objectives, particularly with respect to output and exchange rate. Inflation targeting, in most cases, reduces the role of intermediate targets, such as exchange rate or money growth rate.
 Experience of other countries that have adopted inflation targeting as a monetary framework reveals that the success of the policy depends on not only the transparency of the operation but also on the budgetary discipline. Indeed, the central banks that have become more transparent, more independent, more coherent, and more accountable and more credible have been more successful.
 The controversy among economists on the expenses of inflation targeting has attained particular attention during the past decades .While opponents believe that inflation targeting takes place at the expense of output shortfalls (Cechetti and Ehrmann 1999), proponents (Mishkin 2000, Jonas and Mishkin 2003) believe that inflation targeting promotes investment and economic growth. This paper tries to address the question of whether the performance of inflation targeting in Iran has been successful. Based on a monetary model, using exogenous variables such as official exchange rate, budget deficit, foreign exchange obligation account, and balance of payments, the results suggest that the effects of inflation targeting on the real output is trivial, supporting the natural rate hypothesis.
Highlights
The unhappy experience of the Latin America and East Asian countries with pegged exchange rate regimes who subsequently found themselves in deep financial crisis in the late 1990s has induced other countries to search for alternative nominal anchors
Based on a monetary model, using exogenous variables such as official exchange rate, budget deficit, foreign exchange obligation account, and balance of payments, the results suggest that the effects of inflation targeting on the real output is trivial, supporting the natural rate hypothesis
As the estimated results in the previous section suggest, inflation targeting in Iran does not affect the real output in the long run
Summary
The unhappy experience of the Latin America and East Asian countries with pegged exchange rate regimes who subsequently found themselves in deep financial crisis in the late 1990s has induced other countries to search for alternative nominal anchors. A relatively long list of requirements should be met if the inflation targeting is to operate successfully These requirements include: (i) a strong fiscal position (ii) a well understood transmission mechanism between monetary policy instruments and inflation (iii) a well developed financial system (iv) a clear mandate for price stability (v) absence of other nominal anchors than inflation (vi) transparency and accountability of monetary policy. Since the Iranian economy has started to adopt inflation targets in the medium-term through the Five Year Development Plans since 1989, this paper tries to investigate the feasibility of the targets within a monetary model It tests the hypothesis a trade-off between inflation targeting and real output.
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