Asymmetric Effect of Divisia Monetary Aggregates on Inflation in Iran: Bayesian Approach of Markov Switching Method

Document Type : Research Article

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Abstract

The purpose of this paper is to investigate the asymmetric effects of monetary aggregates on inflation. The present study based on asymmetry of monetary policy related to the phase of the business cycle in place at the time at which this policy was adopted, examines the asymmetric effects of monetary gap on inflation in high and low inflation. Also, due to volatility behavior of inflation in Iran, inflation has modeled as a Markov switching regime. Comparing with other empirical studies, this paper using of Bayesian approach of Markov switching method, has estimated the role of monetary policy in transition of inflation regimes.  Also, P-star model has been used to explain the behavior of inflation in Iran during 1990Q2- 2011Q3. In addition, in this study due to ambiguities surround the money measurement and the role of money in the concept of money stock and the monetary gap, simple sum and Divisia monetary aggregates have been used. The results show that the effects of monetary gaps in inflation regimes are not same and have also investigated asymmetric. Also, these effects in high inflation regimes are weaker than low inflation regimes that it is opposite with conventional view. This matter could be have the reasons as the interruptions of the monetary policy effects, the instability of money demand and more importantly, reduction in velocity of money due to stagnation in Iran's economy and increase in speculative activities. Therefore, regarding asymmetric effects of monetary policies in high and low inflation regimes suggests that the Central Bank designing the appropriate policies during the regimes. Also, the results show that concerning asymmetric effects, Divisia monetary aggregates compared with the simple sum monetary aggregates is more efficiently. Thus, it seems that Divisia monetary aggregates is a better proxy to examine the role of money in macroeconomic policy.

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Journal of Applied Economics Studies in Iran
Volume 5, Issue 17
April 2016
Pages 1-25

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