Central Bank in the time of embargo
Which challenges block the path of the monetary policy maker?
Mahbobe Davoudi/ Doctoral student of economics at Sharif University of Technology
The embargo can be called a negative supply shock, the embargo weakens the foundation of the economy for production, which is interpreted as a potential drop in production in the economic literature. The state of the economy and the way the wheels of the economy work determine the extent of this decline and failure. The more dependent the economy is on imports, including intermediate and capital imports, and in other words, the lower the depth of production in the economy, the greater the potential drop in production as a result of sanctions, and the greater the dependence on consumption imports. In addition to the indirect effects of the drop in production, there will also be a direct drop in welfare for the household following the sanctions.
In fact, the central bank and the government should not undertake expansionary monetary and financial policies thinking that we are in a recession. The conditions of embargo or potential drop in production do not mean stagnation. In fact, a recession is a situation where the demand is lower than the potential production of the economy. Usually, this happens when monetary interest rates in the economy are high, or for any other reason, the demand in the economy for the amount of goods that can be produced has been lower. Under these conditions, expansionary monetary and financial policies are used to stimulate demand.
But today’s smarter central banks don’t move blindly, they target a more useful and informative variable such as inflation, to include supply side shocks. In this way, it does not matter whether the potential production has been constant or not, as soon as the demand exceeds the potential production, the inflation will rise, and with this accurate marking and the use of the right tools, there will never be any doubt about what should be done now. Whether the policies are expansionary or contractionary, they are not wrong.
Therefore, “what the central bank should and can do” to get out of the current situation is very limited, and we can only express “what the central bank should not do” with the aim that the central bank is not an institution that is a and, of course, with the help of the government, to put an end to the economy. In other words, the central bank (including the government) alone can make the situation worse, but alone cannot keep the situation in order.
People don’t know that we didn’t suffer from sanctions, we didn’t suffer from foreigners or enemies, it is from us that we are over us. What happened to us is the result of years of non-professional management and the result of years of wasted time and useless discussions instead of studying and working hard in management and economics faculties. It is the result of pride, stubbornness and malice, which declared all the teachings of a science to be invalid without taking the trouble to control its nature. The result is that we thought “Economics is a simple science”, we hated this thinking that “Economics is a simple science”.
Read the full text of this analysis in No. 306.
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