|Choosing between output targeting and inflation targeting||
There is a general consensus among Iranian economists that the economy is on the verge of an intense period of stagflation.
In order to adopt an appropriate exit strategy out of this situation, the policy makers should first understand the factors behind the situation and in the next step; the appropriate policies should be developed.
Currently there are two rival viewpoints regarding the current situation. On one side, there are economists who believe that the tight strict monetary policy adopted by the Iran’s Central Bank has been a success and has resulted in a considerable drop in inflation, while, according to the economists on the other side, this is the prevailing depression that has reduced the inflation.
The first group, analyze the situation from the money supply point of the view, and the second group see it as a demand-driven phenomenon.
The debate on the apparent trade-off between inflation targeting policies and the output stabilization policies, has led to a policy impasse. One group insists on non-inflationary growth strategy and the other one argues on the necessity for creating a non-recessionary inflation targeting framework.
The policy recommendation for the first approach is to control the money supply and to improve the business environment, and the policy recommendation for the second approach is quantitative easing or a drop in interest rates.
The previous experiences in Iran’s economy show that a pure output targeting policy, like what was adopted during oil boom of 2000s, would not result in success. However, due to the institutional inefficiencies, like defective process of budgeting, infirm autonomy of the central bank, etc., the pure inflation targeting policy would finally fail as well.
So, an objective framework seems to be the only remedy; a package of coordinated, balanced, responsible and predictable monetary and fiscal policies should be devised to realize the government's main goal which is to "increase the national output without fear of having inflationary consequences". Otherwise, an inflationary jump, a jobless growth, or a deadly depression would ensue.
The recent strategy proposal issued by the Economic Coordination Committee seems to be a right step in the right direction. However, a deeper look into the document makes it look like a journalistic economic report rather than a precise policy plan. The current stagflation needs more than that.
Tohid Atashbar is a researcher in the Department of Planning and Budgeting in Iran's Parliament Research Center.
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