An Investigation into the Efficiency of Monetary and Fiscal Policies in Iran Case Study: The 4th Economic Development Plan

Abstract

This study investigates the efficiency of the quantitative targets of monetary and fiscal policies of Iranian 4th economic development plan using dynamic simulation approach. An open macro economy model was designed and eleven behavioral equations were estimated for different economic sectors of Iran for the period of 1971-2004 using autoregressive distributed lag model (ARDL). When the accuracy of the model was determined, the quantitative targets of monetary and fiscal policies of the plan were implemented through a scenario and their effects on some of macroeconomic variables were anticipated for the period of 2005-2013. The comparison of anticipated, realized and targeted values suggests that a more contractionary monetary policy can be used to decline inflation. It should be noted, however, that this policy reduces production and causes depression. To minimize the negative effects of contractionary monetary policy on production sector, more concentration on improved productivity, cost efficiency and improved economic infrastructures are recommended. Judgment concerning the efficiency of fiscal policy targets requires deliberation. The large government size in Iranian economy raises incomes and increases government expenditure. Government income and expenditure should be set and allocated in a manner that it can prepare the prerequisite for minimizing government role in economy and developing the private sector activities. To determine the achievable quantitative targets for fiscal policies it is necessary to determine the optimal government size for Iranian economy, considering the lags of fiscal policies and a long-term planning with the least possible deviation during implementation.