:: year 9, Issue 27 (Spring 2016) ::
JMBR 2016, 9(27): 1-27 Back to browse issues page
The Effects of Liquidity Components on Output and Prices: A VECMX Approach
Hamid Zamanzadeh *1, Ahmad Jalali1
1- Monetary and Banking Research Institute (MBRI)
Abstract:   (5601 Views)

The purpose of this paper is to analyze the transmission effect of “monetary policy”, as reflected by innovations in the growth rate of the stock of M2--which for many years has been the intermediate target of monetary policy in Iran. We recognize that M2 contains both inside and outside money components whose expansion is generated through distinct processes and has differential impact on inflation and output. Moreover, changes in the stock of monetary base reflect changes in the stock of net foreign assets and the stock of domestic assets. Differences in growth rates of the components of liquidity reflect changes in the relative supply of various assets and resources (foreign currency, domestic credit, outside, and inside money), which in turn, induce changes in asset portfolios and credit supply, alter expected rates of return on domestic assets and the exchange rate. Therefore, they can have differential impact on aggregate output and the rate of inflation. To empirically test these propositions, a vector error correction macroeconomic model with exogenous variables (VECMX) that specifies long term structural relationships and the short term dynamics is estimated based on the relevant data on the Iranian economy during 1990 to 2014. The response of macroeconomic variables to monetary shocks confirms different effects of the liquidity components on the output and inflation in the short and long term. These results have significant policy implications for the conduct of monetary policy.       

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Type of Study: Empirical Study | Subject: Monetary Policy, Central Banking, and the Supply of Money and Credit (E5)
Received: 2016/04/13 | Accepted: 2017/01/4 | Published: 2017/05/22

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year 9, Issue 27 (Spring 2016) Back to browse issues page