The Impact of Exchange Rate Policies and Liquidity Creation on Macroeconomic Variables: A DSGE Model Approach
Keywords:
Exchange rate, liquidity creation, monetary policy, inflation rate, Dynamic Stochastic General Equilibrium (DSGE) modelAbstract
The present study aimed to investigate the effects of liquidity creation shocks and exchange rate policy shocks on macroeconomic variables. For this purpose, data from the period 1991–2023 were utilized. In order to analyze the effects of shocks, a Dynamic Stochastic General Equilibrium (DSGE) model was employed. The interdependence between exchange rate policy and monetary policy has consistently existed in the Iranian economy, making these policies one of the major challenges for economic policymakers in the country. In fact, based on published statistics, a significant portion of government budget expenditures is financed through foreign exchange revenues derived from oil exports and withdrawals from the foreign exchange reserve account. Consequently, the Central Bank is compelled to purchase foreign currency, which in turn leads to an increase in the monetary base. Furthermore, monetary policymakers require an accurate understanding of the transmission mechanisms of monetary policies under oil revenue conditions in order to achieve economic stability. This study examined the impact of exchange rate policy through changes in the exchange rate channel and the effect of monetary policy through the liquidity creation channel on macroeconomic variables. The results indicated that an exchange rate policy shock led to an increase in inflation, while simultaneously reducing consumption and income. In addition, shocks originating from liquidity expansion resulted in increases in inflation, production, and consumption.
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Copyright (c) 2025 Seyed Afshin Mosavi (Author); Sara Ghobadi; Bahar Hafezi, Yazdan Gudarzi Farahani (Author)
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