A Non - Inflationary Solution to End Recession

During an interview, the vice-governor of Central Bank of Iran, Akbar Komijani, expounded on non-inflationary monetary strategies crafted by this entity to end recession. The following is a brief summary of discussions.
Recently, some national economists requested the Central Bank to focus on ending the recession instead of inflation. However, the vice-governor of the Central Bank believes that any strategy to end recession has to initially target inflation, the current rate of which makes economic growth impossible. He considered the inelastic supply as the root cause of recession and noted that in the absence of such elasticity on the supply side implementing expansionary policies only feeds further inflation. He believed that positive developments in economic and political situation can redress this situation accelerating exit from recession.
Iran's liquidity growth in eleven months of 1392 (2013) and twelve months of 1392 ending in Bahman (February, 2013) respectively reached 24.9% and 28.3% which are not insignificant. Comparing these figures with consumer price index (CPI) growth shows that real balance of liquidity has increased. In the first eleven months of 1392 (2013), CPI stood at 18.2% and real balance of liquidity increased by 6.7%. In twelve months of 1392 ending in Bahman (February, 2013), CPI reached 22.8% and the differential between liquidity growth and inflation stood at 5.5% unit. Referring to the above statistics, Mr. Komijani rejected claims by critics that the Central Bank adopted contractionary policies last year. He expected that the inflation downward trend rooted in adopting disciplined monetary and fiscal policies, could improve the real balance of liquidity.
With regard to recent discussions on government's priorities as to inflation and recession, the Central Bank vice-governor declared that the main macroeconomic focus of the new government is on beating the inflation. The recent financial decisions and measures such as improving funding methods of Maskan Mehr Housing project and introducing disciplinary budget confirm the government's commitment to hit the said target. It is worthwhile to note that adopting this policy does not contradict government's intentions to end recession in parallel.
Given the recent relative stability in the foreign currency market and inflation rate compared to previous years, Mr. Komijani concluded that the expected fluctuations in inflation rate in the earlier months have been somehow controlled. According to him, it is expected that counter-inflation policies of the government incur lower costs on the decrease in production. In addition, the main root of inflation should be searched in undisciplined fiscal and monetary policies set in supply side.
Mr. Komijani reiterated that sustained inflation damages production. High rate of inflation together with frequent fluctuations in exchange and inflation rates can, in turn, increase economic risks and impose margin costs on funding, detrimental to investment and production. Chronic and high inflation halts economic growth and makes productive activities unattractive. He further concluded that it is basically wrong to address inflation and recession as two separate matters particularly because continuous and sharp decline in aggregate supply can influence inflation. Therefore, policy makers' persistence on curbing inflation and the ensuing uncertainty is a good move to encourage production.
Some critics believe that the economic recession of Iran in 2012 was due to problems in the supply side of the economy subsequently shifted to demand side in 2013 and that the policy makers have to find a way to end the recession by encouraging demand. In response to the criticisms, the Central Bank vice-governor still insisted that the recession rooted in demand-side malaise arguing that the negative supply-side shock to the economy in 2012 relatively continuing in 2013 led to negative growth in demand in 2013. This was not unexpected and should not be merely attributed to demand side. In fact, several factors including decline in household and government's revenues and uncertainty about the future contributed to the decrease in demand. These factors can be said to be rooted in supply-side malaise as well. He concluded that implementing expansionary policies while ignoring problems on the supply side intensifies inflation with no contribution to the process of ending the recession.
On suitable policies to push up demand, Mr. Komijani explained that expansionary policies can help boost aggregate demand. In this respect, amending trade tariff system aimed at facilitating imports, lowering interest rates and reserve requirements as well as increasing discount window lending are among expansionary monetary policies while tax cuts and increased government spending are among fiscal ones. However, any types of expansionary policy should be carefully selected in view of their compatibility with economic capacities and variables. The current internal problems and external pressures make it difficult to stabilize and sustain macro economy; therefore, adopting expansionary policies cannot leave a meaningful impact on the depth of recession. They will only create tangible inflationary pressures.
The Central Bank vice-governor explained that adopting any of the solutions to end recession and their prioritization depends heavily on current issues such as inflation rate fluctuations, supply side, banking system situation and the government's financial resources. In the recent years, stagflation has been fed by inelastic supply, exchange rates fluctuations and imbalanced growth of liquidity. When deciding on suitable policies in order to increase demand, it is very highly important to consider price elasticity of supply as when elasticity is low, adopting any expansionary policies will raise inflation rate.
At the end, Mr. Komijani, once again, reiterated that the current recession is more a product of the impaired supply and hoped that upon macroeconomic improvements together with political and economic stabilization, elasticity of supply accelerates exit from recession.