تیمور رحمانی

Easier control of inflation, avoiding turmoil in interest rates, and reducing the discount rate of government debt securities are the most important outcomes of open market operations.

Monetary policy in Iran, even before the revolution, was deprived of the main means of monetary policy, which is open market operations. After the Islamic revolution, firstly, no attempt was made by policymakers and economists involved in monetary policy to prepare the implementation of open market operations, and secondly, it was thought that there might be a Shari ‘a constraint. Over time, Islamic finance studies have shown that debt securities are publicly tradable and can be bought and sold, and therefore religious considerations in the implementation of open market operations have become irrelevant. However, the monetary policy body still believes in the implementation of monetary policy through the mid-term targeting of monetary aggregates, including the monetary base, although in practice the growth of monetary aggregates continued to remain high, except for short period.
 
Since the beginning of the 2000s, and especially in the second half, the competition to attract deposits from banks has led to a modest drop in monetary base growth, and this has been very prominent since 2011, while the growth of liquidity, depending on the Money Multiplier, not only did not decrease, but also to some extent intensified. However, since the high oil revenues and the control of the exchange rate (and hence the expansion of imports) prevented the emergence of inflationary pressures of high liquidity growth-rates (other than 2010 and 2011, which was also attributed to sanctions), it was thought that the emphasis on keeping down the monetary base growth rate was beneficial.
 
The financial inflammation of 2017 and 2018 showed that the growth and targeting of the monetary base is not a suitable method for monetary policy and the monetary policy mid-term target has to be changed. In the new management period of the Central Bank, a monetary policy package (in addition to packages for the management of the foreign exchange market and banking system reform) was designed, one of the main components of which was the mid-term interest rate targeting using open market operations.
 
In this monetary policy, in order to achieve the optimal inflation rate and the social production level, and of course with considerations around this issue, an interest rate is set for the interbank market as a target interest rate. The Central Bank will then by buying or selling government securities, specifically treasury papers, and therefore injections or withdrawals of liquidity from the interbank market, prevents interbank market interest rates from reaching the target rate. Meanwhile, whenever the Central Bank considers it necessary on the basis of the inflation rate and the optimal social production level, it aims to change its target interest rate. Since the interbank market interest rate plays a key role in determining other interest rates, the Central Bank's goal of determining and manipulating the target rate is to be able to influence the investment and consumption behavior of the country and hence the total expense. Therefore, when the Central Bank considers inflation risk seriously, it aims to increase the target rate by selling bonds, and vice versa if it considers the risk of a recession to be serious.

 But how does open market operations help improve monetary policy
 
The most important contribution of this monetary policy is that inflation control is easier. As we know, since the central banks' monetary policymaking has been shifting to mid-term targeting through open market operations, the average inflation rate in the world has fallen sharply.  
Another benefit of the mid-term target interest rate through open market operations is that it avoids turmoil in interest rates. In other words, open market operations can prevent a broad range of interest rates from emerging even for simil

ar risk-based instruments, as the Central Bank, as a market maker, with its own intervention, will eliminate the need for reserves and liquidity in the economy.
 
Finally, the last but not the least advantage of the mid-term target interest rate through open market operations to the Iran’s economy, is to reduce the discount rate of government debt securities and thus less costly government financing. We know that over the past few years, the discount rate of government bonds has been high and the main reason was no market existed for these securities with the presence of a market maker. When the Central Bank is activated by interruptions on the interbank market through the purchase and sale of government debt securities, these bonds will be risk-free, and therefore their discount rates will be significantly lowered, so to this end the government will not suffer a high discount rate in the provision of budget deficit.

ibena
Teymour Rahmani
Faculty Member of Economics, University of Tehran

Comment

You are replying to: .
3 + 3 =