Examination of the Effects of Exchange Rate and Inflation uncertainty on the Performance of the Central Bank of Iran
Subject Areas : Financial Economics
1 - Department of Economics, Faculty of Economics and Social Sciences, Shahid Chamran University of Ahvaz, Ahvaz, Iran
Keywords: central bank performance, uncertainty, monetary policy efficiency, ARCH model, IVAR model,
Abstract :
One of the factors that creates ambiguity in the effectiveness of monetary policies is the presence of various uncertainties in the economy. Since the Central Bank of Iran has traditionally implemented monetary policies, examining the impact of uncertainties on the outcomes of these policies and their effects on the Central Bank’s performance is essential. Accordingly, this study investigates the effect of exchange rate and inflation uncertainties on the performance of the Central Bank of Iran during the period 1990:1 to 2023:2. To this end, exchange rate and inflation uncertainties were first extracted using the ARCH family approach. Then, employing the IVAR model, the responses of the Central Bank’s target variables (economic growth and inflation) to changes in its monetary policy instrument (growth rate of the monetary base) under high and low levels of uncertainty were analyzed through impulse response functions (IRF). The results indicate that under conditions of low exchange rate and inflation uncertainty, the responses of the Central Bank's target variables to monetary policy shocks are stronger and more sustainable. Furthermore, it was found that increased inflation uncertainty, compared to exchange rate uncertainty, has a greater negative impact on the Central Bank's performance and the effectiveness of monetary policy. Additionally, the impact of inflation uncertainty is more significant on the inflation rate than on economic growth. Accordingly, reducing exchange rate and inflation fluctuations can lead to an improvement in the Central Bank's performance.
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