Asymmetric Preferences of Monetary Authorities and Inflation-Unemployment Behavior in Iran: A Game Theoretic Approach

Document Type : Scientific paper

Abstract

This paper examines for the behavior of inflation and unemployment in Iran for the period 2005-2011. More specifically, we use a general game-theoretic model with asymmetric preferences developed by Ruge-Murcia (2003). The general model allows us to examine the predictions of the Barro-Gordon and Cukierman-Gerlach models regarding inflation-unemployment behavior in Iran. We apply GARCH model to estimate conditional variance of  unemployment. The model is estimated by maximum  likelihood method. Our results reject the prediction of Barro–Gordon model and support the Cukierman’s prediction regarding inflation behavior in Iran. Moreover, the estimation results confirm the asymmetric behavior of the central bank in Iran. In other words, our finding shows that monetary authorities are more concerned with positive deviation of unemployment from its natural rate than its negative deviation. Moreover, we find that conditional variance of  unemployment is an important determinant of inflation rate in Iran. It implies that the policymakers in Iran might avoid further inflation by preventing fluctuations in labor market.
 

Keywords

References

Akgiray, V. (1989). Conditional Heteroscedasticity in Time Series of Stock Returns: Evidence and Forecasts. Journal of Business, 62, 55-80.
Barro, R., &  Gordon. D. (1983). A Positive Theory of Monetary Policy in a Natural  Rate Model. Journal of Political Economy,  91,  589–610.
Berlemann, M. (2005). Time Inconsistency of Monetary Policy: Empirical Evidence from Polls. Public Choice, 125, 1–15.
Bollerslev, T. (1986). Generalised  Autoregressive  Conditional Heteroscedasticity. Journal of Econometrics, 31, 307-328.
Canavese, A. J. (1982). The Structuralist Explanation in the Theory of Inflation. World Development. 10, 523-529
Cukierman, A., & Gerlach, S. (2003).The Inflation Bias Revisited: Theory and some International Evidence. The Manchester School , 71, 541-565.
Ebrahimi, M., & Souri, A. (2007). The Releationship between Inflation and Uncertainty of Inflation in Iran. Science and Development. 18, 111-126. (In Persian)
Friedman, M.,  Schwartz, A. J. (1963). A Monetary History of the United States 1867–1960. Princeton University Press.
Gerlach, S. (2000). Asymmetric Policy Reactions and Inflation. Bank for International Settlements, Mimeo.
Gordon, R. J. (1988), Macroeconomics: Theory and Policy, 2nd ed., McGraw-Hill.
Greene, W. H. (2003). Econometric Analysis. Fifth Edition, New York:  New York University.
Ireland, P. N. (1999). Does the Time-Consistency Problem Explain the Behavior of Inflation in the United States?".  Journal of Monetary Economics,  44, 279–292.
 Kazeroni, A., &  Asghari, B. (2002). Testing Inflation Model in Iran. Iranian Journal of Trade Studies. 23, 97-139. (In Persian).
Kydland, F. & Prescott, E. (1977). Rules rather than Discretion: The Inconsistency of Optimal Plans.  Journal of Political Economy,  85, 473–490.
Mohammadi, T., & Taleblou, R. (2010). Daynamics of Inflation and Inflation Uncertainty Using ARFIMA-GARCH Model. Economic Research Review Quarterly. 10, 137-170. (In Persian)
Nasr Isfahani, R., & Yavari, K. (2003). The Effects of Nominal and Real Variables on Inflation in Iran. Quarterly Iranian Economic Research, 16, 69-99. (In Persian)
Neuenkirch, M., & Tillmann, P. (2014). Inflation Targeting, Credibility, and Non-linear Taylor Rules. Journal of International Money and Finance, 41,30-45.
Romer, D. (2012), Advanced Macroeconomics, 4th edition. McGraw-Hill, Irwin.
 Ruge-Murcia, F. J. (2003). Does the Barro–Gordon  Model Explain the Behavior of US Inflation? A Reexamination of the Empirical Evidence. Journal of Monetary Economics, 50, 1375–1390.
Ruge-Murcia, F. J. (2004). The Inflation Bias when the Central Banker Targets the Natural Rate of Unemployment. European Economic Review, 48, 91–107.
 
Sachsidaa, A., & Angelo Divinob, J., & Cajueiroc, D. O.  (2011). Inflation, unemployment, and the time consistency of the US monetary policy. Structural Change and Economic Dynamics, 22 , 173–179.
Staiger, D., & Stock, J. H., &  Watson, M. W. (1997). The NAIRU, Unemployment and Monetary policy. Journal of Economic Perspectives, 11, 33–49.
Tashkini, A. (2007). Does Uncertainty of Inflation Change with Level of Inflation?. Tahghighat-E-Eghtesadi.73, 193-210. (In Persian)
Taylor, J. B. (1997). Comment. In: Romer, C.D., Romer, D.H. (Eds.), Reducing Inflation: Motivation and Strategy, University of Chicago Press, Chicago, pp. 276-280.
 Weiner, S. E. (1993). The Natural Rate and Inflationary Pressures. Economic Review of the Federal Reserve Bank of Kansas City , 79, 5–9.

Files

History

  • Receive Date: 16 March 2013
  • Revise Date: 08 February 2014
  • Accept Date: 08 June 2014

Share

How to cite

Statistics