Program and Development Research

Program and Development Research

Reforming the price stabilization approach in Iran: Orthodox policies versus heterodox policies

Document Type : Original Article

Author
Mehdi Hajamini
Associate Professor in Economics, Department of Economics, Yazd University Yazd, Iran.
10.22034/pbr.2025.530043.1546
Abstract
While the average inflation in the world during the last three decades was only 6.7%, Iran’s economy experienced an average inflation of 20%. Why have policy-makers failed to curb inflation? On the one hand, Iran’s inflation has turned into “chronic average inflation” due to the inappropriate exchange rate-trade system, like the past inflations of Latin America. In the other hand, control policies and economic repressions have created “accumulated suppressed inflation” similar to Eastern European countries. What is the correct price stabilization program? What nominal anchor should the Central Bank of Iran use to curb inflation? There are two opposing views. The orthodox emphasize on money-based stabilization with a flexible exchange rate system; but the heterodox consider the role of incomes policies and the use of the exchange rate anchor to be important (exchange rate-based stabilizations). The quarterly data of the four eight-year governments after the war (1989:3-2021:3) was used for the determination of the nominal anchor for curbing inflation (asymmetric causality), and then its ability was evaluated using quantitative theory money. According to the estimates of the first step, changes in Iran’s chronic average inflation occurred with changes in monetary variables, while the exchange rate is not causal of inflation, only weakly plays as a temporary maintainer of inflation. In the second step, the findings showed that in all the governments of Hashemi Rafsanjani, Khatami, Ahmadinejad and Rouhani, there was a one-to-one relationship between inflation and liquidity. So, the monetary anchor has had the full ability to curb inflation. Now the economy needs to change its approach to the orthodox view. Five decades of exchange rate stabilization has changed Iran’s inflation from a flow problem to a problem of stock variables (accumulated suppressed) and now its solution depends on structural reforms in the budget and exchange rate system so that the monetary anchor becomes operational.
Keywords
inflation
orthodox policies
heterodox policies
stabilization nominal anchor

Subjects

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Program and Development Research
Volume 6, Issue 3 - Serial Number 23
Autumn 2025
Pages 199-245