Islamic Republic of Iran: Selected Issues Paper
Author: International Monetary Fund
Publication Date:
27 Sep 2004
eISBN:
9781451819007
Language:
English
Keywords:
ISCR; CR; central bank; GDP; rate of return; monetary policy; price; managed float; monetary policy implementation; monetary policy formulation; foreign exchange; monetary management; Monetary policy instruments; Monetary base; Liquidity; Financial derivatives; Commercial banks
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This Selected Issues paper analyzes economic growth in Iran. It uses a growth-accounting exercise to quantify the historical sources of growth over 1960–2002, including human capital accumulation and the contribution of Total Factor Productivity to growth. The paper presents an empirical study to quantify the role of several other contributing factors commonly discussed in the cross-country growth literature, including macroeconomic stability, financial development, trade openness, and the change in the terms of trade. The paper also examines issues in medium-term management of oil wealth in Iran.

Abstract

This Selected Issues paper analyzes economic growth in Iran. It uses a growth-accounting exercise to quantify the historical sources of growth over 1960–2002, including human capital accumulation and the contribution of Total Factor Productivity to growth. The paper presents an empirical study to quantify the role of several other contributing factors commonly discussed in the cross-country growth literature, including macroeconomic stability, financial development, trade openness, and the change in the terms of trade. The paper also examines issues in medium-term management of oil wealth in Iran.

Chapter IV. Moving Toward Market-Based Monetary Policy31

I. Introduction

92. A reform of the monetary policy framework in Iran is needed in connection with increasingly liberalized financial system (Chapter III) and the authorities’ objective of reducing inflation to a single-digit number. Drawing on academic research and the experience of other countries, as well as on the lessons learnt from monetary policy management in Iran over the past 14 years, this chapter sketches a transition path from a monetary policy system characterized by administrative controls and fiscal dominance toward one based on market incentives and signals. The chapter outlines a set of options for moving toward this objective, increasingly relying on indirect instruments of liquidity management consistent with Islamic finance principles.

93. The chapter is organized as follows. Section II analyzes the main lessons from Iran’s own experience in conducting monetary policy and highlights the difficulties encountered by the Central Bank of Iran in achieving its monetary policy goals with limited instrument independence. Section III underscores the need to clarify monetary policy objectives and targets, enhance central bank instrument independence, improve the coordination between monetary and fiscal policies, and develop indirect instruments of liquidity management. Section IV concludes by recommending a transition toward a monetary aggregate targeting.

II. Lessons from Iran’s Experience in Monetary Policy Implementation

A. Institutional Set-up

94. The current setting of monetary policy formulation and implementation relies to a large extent on administrative controls in the context of fiscal dominance (Box 4.1.) and lack of market-based instruments. While administrative controls are in part used to alleviate the inflationary impact of fiscal dominance and to favor the redistribution of credit resources according to government priorities, they are also motivated by the slow progress in developing money market instruments consistent with Islamic finance principles.

Fiscal Dominance

Fiscal dominance has been an important source of high liquidity growth and inflation in Iran. The most general definition of fiscal dominance stipulates that “monetary policy is subordinated to fiscal financing requirements” (Sargent and Wallace, 1981) or fiscal policy is active while monetary policy is passive (Leeper, 1991).

In the context of Iran, an oil-producing country, the government budget relies to a large extent on oil export revenue earned in foreign currency; and domestic and foreign bond financing has been very limited until recently. Since central bank financing of government deficits (“pure” seigniorage) as well as spending out of foreign exchange-denominated oil revenue result in an increase in high powered money, two separate channels of fiscal dominance are at play.

The role of “pure” seigniorage has been steadily declining. Direct central bank credit to the government was virtually discontinued in 1998/99 (except bank recapitalization operations and some quasi-fiscal subsidies financed by the central bank), while central bank credit to NFPEs continues at a small scale (Figure 4.1).

Figure 4.1.
Figure 4.1.

Islamic Republic of Iran: Sources of Base Money Growth, 1991/92–2002/03

(Increase as a percentage of the beginning-of-period base money)

Citation: IMF Staff Country Reports 2004, 308; 10.5089/9781451819007.002.A004

Sources: Iranian authorities; and Fund staff estimates.1/ Estimated by subtracting all sources of financing from oil revenue.

In addition to “pure” seigniorage, spending out of export oil revenue is equivalent to a foreign-financed expenditure and thereby has a substantial impact on base money and real rates of return, in particular under less-than-perfect capital mobility (Barnett and Ossowski, 2003). In Iran, the variation in expenditure and its liquidity effects have been high (Figure 4.1). In this context, fiscal dominance has been manifested in the inability of the central bank to offset large sudden changes in liquidity conditions stemming from fluctuations in government sales of foreign currency-denominated oil revenue mainly due to their sheer magnitude. Insufficient development of appropriate instruments of liquidity control has also complicated liquidity management.

95. The current approach to monetary policy formulation gives the government a decisive influence in setting specific monetary targets. In particular, Five-Year Development Plans (FYDP) set annual targets for monetary growth and inflation, which are approved by Parliament and must be used as benchmarks for formulating monetary programs by the central bank. At the operational level, the Monetary and Credit Council (MCC) is the body responsible for day-to-day monetary policy decisions. While the Governor of the central bank is a member of the MCC, the Minister of Economy and Finance is its chairman and other ministers are also represented. Parliament and the government can also issue directives for credit allocation, which could have implications for monetary policy implementation. In practice, the targets for M2 and inflation fixed in FYDP are usually revised by the MCC in its annual monetary guidelines. But even these revised targets are often inconsistent with fiscal financing requirements and other important decisions, in particular those on the administratively set rates of return and other direct controls on banking system activities.

96. Against this background, the central bank has not been able to meet its intermediate target for M2 since the inception of FYDPs. More importantly, these targets were exceeded by very large margins, and as a result, the inflation rate objectives were not achieved during the first two FYDPs (Table 4.1). While the average CPI target for the third FYDP is likely to be met, there is a risk that the inflation target of 13 percent for 2004/05 fixed in the third FYDP would be exceeded by 2 or 3 percentage points.

Table 4.1.

Islamic Republic of Iran: Monetary Targets, 1989/90–2004/05

(Percentage change)

article image
Sources: Central Bank of Iran Iran; and Fund staff estimates.

Four-year averages, 2000/01–2003/04.

At factor cost at constant 1997/98 prices.

B. Instruments of Monetary Policy and Key Challenges

97. The range of monetary policy instruments has evolved over time but still remains inadequate. During the early 1990s, direct administrative controls were predominant and policy decisions on credit ceilings and directed credits, as well as rates of return on loans and deposits, were often inconsistent with the stated objectives for M2 or inflation (Box 4.2.).

Evolution of Monetary Policy Instruments

The role of direct instruments of monetary policy has gradually declined. Direct ceilings on refinancing facilities of commercial banks were abolished in 1991/92 and new directed or “pre-arranged” credits of the central bank to commercial banks were de facto discontinued in 1998/99. The requirement to hold government bonds was gradually relaxed during 1993/94 when banks were authorized to sell these bonds to the central bank.

Sectoral credit allocation limits and control on rates of return of state-owned banks have been gradually eased, but remain significant. They are approved at the beginning of the fiscal year and almost never adjusted in the course of the year. The share of banking credit subject to sectoral allocation limits has been gradually reduced to 55 percent. While state-owned banks can allocate 45 percent of loans without sectoral restrictions they are still bound by administered rates of return fixed for each sector.

Controlled rates of return on both loans and deposits were negative in real terms for the most part of the period under review, contributing to inflationary pressures and lack of progress in financial deepening (Figure 4.2). Moreover, real rates of return display a clear pro-cyclical pattern—they are negatively correlated with the output gap––which means that monetary conditions become tighter during economic slowdowns and more relaxed during expansions (Figure 4.3). This is attributable to the limited flexibility of the rates of return combined with the liquidity impact of pro-cyclical fiscal policy.

Required reserves remain high and differentiated by maturity of deposits. This has allowed the central bank to have better control on broader monetary indicators and increase demand for base money, thereby offsetting some of the impact of fiscal dominance. This in effect represents a tax on financial intermediation, as required reserves are only remunerated at 1 percent per annum. The weighted average required reserve ratio declined to 16 percent in 2003/04 from 23 percent in 1990/91, which in part explains an upward trend of money multipliers (Figure 4.4).

Foreign exchange operations, excluding those with the central government, represent an increasingly important element of monetary policy implementation. In fact, in 2002/03, the central bank’s sales of foreign exchange in both domestic and off-shore interbank markets amounted to about $13 billion (or almost 100 percent of beginning of period base money).

The overdraft facilities of the central bank have not been supportive of monetary policy objectives. These facilities are in great demand by commercial banks because the interbank market is virtually non-existent. In practice, the central bank accommodates liquidity shortfalls in the payment system without consistently enforcing the existing incentives against repeated large recourse to overdrafts. The overdraft rates had been set at only 2 percentage points above the directed credits until 1993/94 when they were replaced with a progressive schedule of overdraft rates at 20, 24, and 30 percent depending on access levels. If overdraft periods exceed three days, an additional 4 percentage points is added to each tier. Despite revisions to other administered rates in the banking system and sharp fluctuations in annual inflation since 1993/94, the overdraft rates have not been revised. Moreover, on some occasions, overdraft penalty payments were waived. Frequent recourse to relatively cheap or even penalty-free overdraft facilities often put the central bank in an accommodating position. There is also a standing credit facility providing financing up to one year.

The standing deposit facility (open deposit accounts) introduced in 1998/99 has played a marginal role in central bank operations. This facility has been used to regulate within-year liquidity fluctuations, but by year-end when most banks experienced liquidity pressures, the deposits were usually drawn down substantially. In 2003/04, the central bank attempted to auction deposit facilities to commercial banks, but there was no demand for such instruments in part owing to unattractive terms.

Central bank participation papers (CBPP)—which are Shariah-compatible—were first issued in March 2001 (Table 4.2). The bearer securities are issued in parcels of Rls 1, 2, 5, and 10 million, which reflects their retail focus. Maturities are 6 or 12 months with quarterly coupon payments, which are not taxable. The CBPP are issued based on a portfolio of completed infrastructure projects previously financed by the central bank credit to government and yield a predetermined rate of return presumed to approximate the returns on underlying assets. This means that the CBPP are backed by underlying central bank claims on the government. The initial thinking was to create a marketable money market instrument which would empower the central bank to regulate liquidity and provide a viable instrument for liquidity management by commercial banks. The ultimate objective was to foster the development of an interbank market (Ul Haque and Mirakhor, 1998). However, the final design turned out to be somewhat different.

CBPP have only been issued to nonbanks in the primary market at pre-announced rates of return. Commercial banks are obliged to rediscount them in the secondary market at par and guarantee the initial yield to maturity. In other words, CBPP cannot be traded in the secondary market at prices different from par and in fact represent a highly liquid instrument held by nonbanks. While to some extent, these instruments have helped absorb liquidity created by government’s sales of foreign currency-denominated oil revenue during the period of high oil prices, their high cost to the central bank raises questions about sustainability of their growing stock. Moreover, at times, the central bank has not been able to achieve the targeted amount of issues at the rate of return fixed by the MCC.

Government participation papers (GPP) did not play major role in attenuating the impact of fiscal dominance or stimulating the development of money markets. They were first issued in 1998 (Table 4.2). (Participation papers of municipalities and various ministries and public enterprises have been authorized since 1994). A GPP is an instrument used for financing non-specific government infrastructure projects, by providing investors a temporary (equal to the maturity of the paper) equity stake in the underlying assets. The government promises to pay on maturity a return that approximates the rate of return on the underlying asset, which should be at least equal to the private sector rate. GPP is a different instrument from government bonds issued in the 1980s. GPP were not designed for use by the central bank to manage liquidity, but were primarily intended to finance central government infrastructure projects. GPP were issued in the primary market at pre-announced fixed rates of return with five-year maturity and their outstanding stock remains modest. Banks are obliged to rediscount GPP in the same manner as CBPP (see above). The tax-adjusted rates of return on GPP were below those on CBPP despite a much longer maturity of the former. This implies a negatively-sloped yield curve of rates of return, which has reduced the attractiveness of GPP in the presence of high uncertainties over future inflation developments.

Table 4.2.

Islamic Republic of Iran: Government Participation Papers and Central Bank Participation Papers, 1997/98–2002/03

(In billions of Rials, unless otherwise indicated)

article image
Source: Central Bank of Iran.
Figure 4.2.
Figure 4.2.

Islamic Republic of Iran: Real Rates of Return, 1991/92–2002/03

(In percent)

Citation: IMF Staff Country Reports 2004, 308; 10.5089/9781451819007.002.A004

Sources: Central Bank of Iran; and Fund staff estimates.
Figure 4.3.
Figure 4.3.

Islamic Republic of Iran: Non-oil Output Gap and Real Rates of Return, 1991/92–2002/03

(In percent)

Citation: IMF Staff Country Reports 2004, 308; 10.5089/9781451819007.002.A004

Sources: Central Bank of Iran; and Fund staff estimates.
Figure 4.4.
Figure 4.4.

Islamic Republic of Iran: Money Multiplier, 1991/92–2002/03

Citation: IMF Staff Country Reports 2004, 308; 10.5089/9781451819007.002.A004

Sources: Central Bank of Iranian; and Fund staff estimates.

98. Since the mid-1990s, the authorities have gradually phased out direct controls and introduced some indirect instruments of monetary policy that were partially market-based (Box 4.2.). In particular, central bank participation papers (CBPP) were introduced in 2001 to mop up excess liquidity. However, their primary issuances are made at a fixed rate of return, secondary trading can only be done at par, and banks are not authorized to buy them in the primary market. These design features of CBPP have limited their effectiveness.

99. The 2002 exchange rate unification and the establishment of a managed float exchange rate regime raised the issue of the appropriate nominal anchor, as well as the related supporting policies. While the central bank has increasingly focused monetary policy implementation on M2, such a policy has not yet achieved sufficient credibility to effectively anchor inflationary expectations. Indeed, in the aftermath of the 2002 exchange rate unification, exchange rate considerations continued to be dominant, initially out of concern for the stability of the nominal rate, and subsequently to preserve competitiveness through a gradual nominal effective depreciation of the exchange rate to compensate for past inflation differentials. This dual-objective policy, however, became difficult to sustain in the face of increased supply of foreign exchange stemming from fiscal relaxation and FDI inflows. In the attempt to contain growth of monetary aggregates while continuing with nominal exchange rate depreciation, the central bank started to use CBPP to mop up excess liquidity at relatively attractive fixed rates of return, thereby bearing directly the cost of sterilization operations. With the rapid increase in the CBPP stock, these operations became costly and less effective in offsetting large injections of oil revenue into the system. As a result, the amount of unsterilized purchases became a function of exchange rate objectives, and the control over monetary aggregates has weakened. The policy of nominal depreciation has not prevented the real effective exchange rate from appreciating by 7.5 percent during 2002/03–2003/04.32

100. During the last two years, the policy on rates of return has conflicted with monetary policy targets as well. Negative real rates of return on loans for the major sectors of the economy, such as industry, mining, and agriculture helped fuel credit demand growth, which the central bank accommodated through its overdraft facilities (Box 4.2.). It is also clear that the rapid credit growth, together with large unsterilized purchases of foreign exchange from the government, also contributed to nominal exchange rate depreciation.

III. Next Steps

A. Monetary Policy Framework

101. As highlighted above, there is a pressing need for improving the current monetary policy framework while enhancing coordination between fiscal and monetary policies. Drawing on the extensive academic literature and operational experience of central banks in market-based financial system (Walsh, 2003), this sub-section highlights the general principles for an effective monetary policy framework, while the next sub-section elaborates on the implications of using Shariah-compliant monetary policy instruments.

Monetary policy objectives

102. Since Iran has chosen a managed float exchange rate regime, 33 price stability should be an overriding objective of monetary policy. Possible intermediate targets consistent with this objective include a monetary aggregate or a measure of consumer price inflation. Targeting a monetary aggregate such as broad (M2) or narrow (M1) money is perhaps more familiar to policymakers in Iran and has less stringent institutional and policy requirements than targeting say an annual percentage change in CPI.34 The intermediate target could be set jointly by the government and the central bank, consistent with the desired outcomes for inflation.

103. A greater simplicity of the transparency and accountability requirements under monetary targeting is another argument in its favor. In contrast to inflation targeting (Schaechter et al, 2000), adherence to monetary targets are easier to monitor. Indeed, a timely publication of data on monetary aggregates is an important accountability requirement, but it is easier to prepare, interpret and understand than subtle explanations of monetary policy actions needed to achieve inflation objectives in the presence of complex transmission mechanisms.

104. A transition toward monetary aggregate targeting could be considered notwithstanding money velocity instability in the recent past (Figure 4.5). The empirical study of Celasun and Goswami (2002) finds that inflation is affected by real money and output growth, but also depends on exchange rate developments and the degree of deviation of real money demand from its equilibrium level. The implication of these findings is that inflation forecasts are subject to uncertainty and it would be difficult for the central bank to meet an inflation target by adhering strictly to intermediate M1 or M2 targets, which could also be formulated as a narrow band. This does not mean however that M1 or M2 targeting should not be considered as an option. An indicative inflation objective could be formulated as a band, in order to accommodate forecast errors in setting an annual target for M1 or M2 growth.

Figure 4.5.
Figure 4.5.

Islamic Republic of Iran: Income Velocity of Money, 1991/92–2002/03

Citation: IMF Staff Country Reports 2004, 308; 10.5089/9781451819007.002.A004

Sources: Central Bank of Iran; and Fund staff estimates.

105. The central bank needs to determine an operational target that it could control directly. Possible operational targets include base money or money markets rates of return. The latter, however, are not readily available given the status of development of money markets in Iran. Thus, base money could be initially selected as an operational target. Given the instability of money multipliers 35, the base money target should be revised periodically in light of new information so as to maximize the chances of hitting the intermediate target for M1 or M2. It is also important to ensure that fiscal policy is consistent with the need to achieve the base money operational target, which would require a careful assessment of the liquidity impact of fiscal operations at the budget preparation level. More specifically, the authorities would need to ensure that the size and composition of the non-oil deficit financing is consistent with the operational and intermediate targets of monetary policy.

Instrument independence of the central bank

106. As mentioned above, current legislation, provides the central bank with limited authority in using monetary policy instruments, such as rates of return or the amount of CBPP issuance, without the prior approval of the MCC, which is headed by the Minister of Finance and Economy. This institutional arrangement does not give the central bank the needed flexibility to deal rapidly with changes in money and credit conditions during the year. Moreover, the ability of the government or parliament to issue credit directives also undermines the ability of the central bank to meet its intermediate targets. In this regard, granting central bank instrument independence 36 is essential for successful implementation of monetary aggregate targeting. Central bank independence would need to be combined with stringent accountability requirements before various layers of authority and the public. Transparent procedures for resolving potential conflicts between monetary policy and broader economic policy objectives would also need to be established.

107. The range of instruments at the disposal of the central bank could be broadened and the existing instruments would need to be adapted to the new framework. The required reserve ratios could be unified and reduced to lower the cost of financial intermediation, provided that offsetting measures to mop up excess liquidity are implemented. Access to standing credit facilities could be tightened and made more onerous to discourage frequent use. Indirect instruments of monetary policy would need to be redesigned and gradually become the preferred instruments facilitating the emergence of a benchmark rate of return (see below a description of options which could be implemented in the short run). Once money markets gain in depth and experience, the operational target could be changed from base money to a rate of return on an appropriate money market instrument (see below). Foreign exchange operations will continue to be important, but the central bank needs to gradually shift the emphasis in these operations from the exchange rate to base money by more actively using indirect instruments of monetary policy and tolerating greater fluctuations in the exchange rate 37. Monetary instruments alone, however, are unlikely to be sufficient to sterilize the liquidity impact of injections of government oil revenue in the system (Box 4.1.) or large capital inflows, and as a result, fiscal policy actions would also be needed. Moreover, in the longer run, financial markets deepening considerations call for incorporating market-based principles in the design of government participation papers and increasing their outstanding volumes and liquidity.

B. Shariah-Compliant Indirect Instruments of Monetary Policy

108. This sub-section reviews options for developing Islamic money market instruments in Iran. A number of difficulties arise in designing short-term financing instruments that are Shariah-compliant, i.e., that are interest-free, rely on profit and loss sharing linked to real transactions, or are based on purchase and resale contracts, and whose value can be determined at a high frequency to facilitate short-term trading and money market operations. In response, several central banks—notably in Malaysia, Sudan, and Bahrain—have developed Islamic financial instruments to facilitate liquidity management (by the central bank, as well as the commercial banks) and public borrowing (Majid, 2003). In parallel, there has been a growing use of asset securitization techniques to design Islamic securities for issuance in regional and international capital markets (Hassan, 2002). This has opened the door for developing short-term instruments for monetary operations.

109. Effective market-based monetary operations require an instrument with the following characteristics:

  • A relatively risk-free instrument that can serve as a benchmark to price other more risky instruments of varying maturities and strongly influence the marginal cost of funds for banks;

  • sufficient supply of the instrument to meet both monetary policy needs and portfolio needs of investors;

  • the instruments must be widely held by both banks and nonbanks to support a liquid market; and

  • the payment settlement system must be robust and reliable to facilitate trading in the instrument.

110. Based on these criteria, a structure that securitizes a range of Islamic financial contracts seems the most promising for monetary operations; all other market instruments do not meet one or more of the criteria for effective monetary operations.

111. Purely equity-based instruments (Musharaka)—structures containing only cash-flow rights from government ownership in enterprises—can carry high returns that raise costs to the government. Also, the volume of issuance of such instruments may not be sufficient for monetary policy purposes, insofar as the issue amounts are limited by the extent of government ownership in high quality enterprises.

112. Purely commodity resale type instruments (Murabaha) and participation papers with guaranteed minimum returns cannot trade at prices different from par, under Islamic finance principles, and thus cannot be a reliable basis for developing inter-bank money markets.

113. Pure debt-type contracts (Mudarabah), such as interbank deposit placements linked to bank profits, are not suited for liquidity absorption operations of central banks, given the difficulties in linking returns to central bank profits. Moreover, differences in perceived bank risks might limit the volume of interbank placements.

114. Thus, securities based on a mixture of contracts—representing equity (Musharaka), debt (Mudarabah), and leasing type financing (Ijara)—carry the best chance of being issued in sufficient volume, can achieve adequate market liquidity, and provide sufficient flexibility in the mix of risks and return. The mix of contracts should be transparent so as to allow investors to assess risks and form expectations of returns based on expected performance of the underlying cash flow.38

115. In light of the above argument, the ongoing issues of CBPP in Iran can be transformed over time to become an effective instrument of monetary management:

  • by identifying a wider range of government assets and cash flows that can be securitized;

  • strengthening coordination of public expenditure management and government financing program to ensure an optimal combination of assets that can be securitized;

  • adopting high quality and transparent accounting and disclosure framework for communicating the value and returns on the underlying assets;

  • adopting auction-based primary issuance that helps to reflect market expectations in the price of the security;

  • supporting the liquidity of the instrument in the secondary market through repurchase facilities; and

  • organizing efficient trading and payment settlement arrangements.

116. Such newly designed Shariah-compliant instruments would overcome the current constraints on Iran’s CBPP, and allow more flexible rates of return and a better functioning secondary markets to emerge, thereby facilitating more effective monetary and public debt management.

IV. Conclusion

117. The current system of monetary policy formulation and implementation still relies on administrative controls to a large extent in the context of fiscal dominance. While administrative controls are in part used to alleviate the inflationary impact of fiscal dominance and to direct credit resources according to government priorities, they are also motivated by the slow progress in developing money market financial instruments consistent with Islamic finance principles.

118. The need for a properly sequenced financial liberalization and the stated objective of reducing inflation call for major changes in the monetary policy framework in Iran. Initial steps in this area could seek to develop monetary aggregate targeting. Central bank instrument independence, stringent accountability requirements, and the development of indirect instruments of monetary policy are the major ingredients of success in this area. Although developing liquid money market instruments consistent with Islamic finance principles may be a difficult undertaking, the obstacles are surmountable as evidenced by the experience of other countries.

119. Reforming monetary policy alone will not remove inflationary pressures or enhance financial intermediation. The elimination of fiscal dominance, the restructuring of the banking system with a greater emphasis on private sector participation and competition, as well as other institutional reforms, are key to achieving sustainable low-inflation growth.

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31

This chapters draws on the paper presented by V. Kramarenko and V. Sundararajan during the conference organized by the Islamic Development Bank in Tehran, February 16–21, 2004.

32

REER was compiled using a trade-weighted index that excludes oil trade.

33

See Sundararajan et al (1999) and Celasun (2003) for a justification of this choice.

34

A discussion on the pre-requisites for establishing an inflation-targeting framework and the assessment of Iran’s compliance with these pre-requisites is beyond the scope of this paper (see Jbili and Kramarenko, 2003 for a detailed analysis).

35

The multiplier instability has been recently caused by a significant increase in use of pre-paid checks for payments that reduced demand for banknotes. Although there is a requirement that checks should not be endorsed more than once, in practice, they are endorsed many times before being deposited with a bank.

36

Day-to-day independence in using all relevant instruments needed to achieve intermediate targets subject to a possible override provision for the government.

37

The medium-term issues of competitiveness and the appropriate level of the exchange rate are beyond the scope of this paper, which is focused on short-term aspects of monetary policy implementation.

38

Also, the proportion of pure equity type contracts in the overall asset mix could be higher for longer maturities, thereby varying the risk-return trade-off by maturity.

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Cover IMF Staff Country Reports
Islamic Republic of Iran: Selected Issues Paper
Author: International Monetary Fund
Volume/Issue:
Volume 2004: Issue 308
Publisher:
International Monetary Fund
ISBN:
9781451819007
ISSN:
1934-7685
Pages:
72
DOI:
https://doi.org/10.5089/9781451819007.002
  • View in gallery

    Islamic Republic of Iran: Sources of Base Money Growth, 1991/92–2002/03

    (Increase as a percentage of the beginning-of-period base money)

  • View in gallery

    Islamic Republic of Iran: Real Rates of Return, 1991/92–2002/03

    (In percent)

  • View in gallery

    Islamic Republic of Iran: Non-oil Output Gap and Real Rates of Return, 1991/92–2002/03

    (In percent)

  • View in gallery

    Islamic Republic of Iran: Money Multiplier, 1991/92–2002/03

  • View in gallery

    Islamic Republic of Iran: Income Velocity of Money, 1991/92–2002/03

Islamic Republic of Iran: Sources of Base Money Growth, 1991/92–2002/03

(Increase as a percentage of the beginning-of-period base money)

Islamic Republic of Iran: Real Rates of Return, 1991/92–2002/03

(In percent)

Islamic Republic of Iran: Non-oil Output Gap and Real Rates of Return, 1991/92–2002/03

(In percent)

Islamic Republic of Iran: Money Multiplier, 1991/92–2002/03

Islamic Republic of Iran: Income Velocity of Money, 1991/92–2002/03