The Calculation of the Monetary Condition Index (MCI) in Iran Economy (1978–2012)

Abstract

T he completed MCI includes three main channels of interest rate, exchange rate and credit rate. In developing countries such as Iran, this indicator, which contains a credit channel, could be better used to illustrate the country’s monetary condition. This study has been done to calculate this index for the period of 1978–2012. For this purpose, the function of the total economy demand is estimated in order to extract the variables weight in this index, using the self-explanatory Autoregressive Distributed Lag (ARDL) approach. According to the model estimation results, the exchange rates weights are higher than interest rate channel in the MCI calculation. Using the weights derived from the model estimation, the nominal and real MCI have been calculated. Eventually, by estimating the inflation equation and comparing the root mean squared error (RMSE) of the two, it has been found that the predictive power of inflation in the real MCI is higher than the nominal.