The effect of monetary policies on the intensity of Exchange Rate Pass-Through considering different levels of inflation uncertainty with the approach of dynamic systems

Abstract

This study has been conducted with the aim of investigating the effect of optimal monetary policies on Exchange Rate Pass-Through with the approach of dynamic systems. The present study is considered as an applied study in terms of the method used. In this study, the dynamic systems approach in Vensim software space has been used to estimate the model. Three scenarios and three policies are defined in this study. A low level of inflation uncertainty is included in scenario one, a medium level of inflation uncertainty in scenario two, and a high level of inflation uncertainty in scenario three. Interest rate changes are included in the first policy, open market operations in the second policy, and liquidity changes in the third policy. According to the results, it is quite evident that the increase in inflation uncertainty from scenario one to scenario three has caused a sharp increase in inflation in the coming years; As a result, it can be said that in a situation where inflationary uncertainty is high, Exchange Rate Pass-Through has been more intense. The policies of liquidity changes have not had a favorable effect on the Exchange Rate Pass-Through and these policies have caused the worsening of the Exchange Rate Pass-Through and a sharp increase in inflation in the Iranian economy. In the second policy of open market operation, it is also evident that the presence of the central bank in the exchange rate market has not improved the exchange rate transition, and this may be due to the central bank's lack of independence from the government's financial policies. The interest rate policy has been more successful in the Exchange Rate Pass-Through than other policies; The results show that it has not worked successfully even in the high level of uncertainty.