A New Framework for Hegemonic Analysis of Monetary Policy: The Case of Iran

Abstract

Monetary policy rule might be helpful to avoid the problem of time inconsistency provided there is a commitment to the rule. The commitment is the ability of a government to bind future policies. However, it doesn't include intrinsic motivations. Therefore, hegemony, which includes both intrinsic and extrinsic motivations, better solves the problem of time inconsistency. In this paper, we explain the nature of hegemony and discuss why hegemony is preferred to commitment. We have used an index of hegemony to evaluate monetary policy and estimate the hegemony of Supervisory Packages on Monetary Policy (SPMP) of Islamic Republic of Iran for the period 2008-2011 by using fuzzy logic. The results show that an optimal hegemonic policy is better than the optimal commitment policy if and only if adjusted total effect of intrinsic motivation on an agreed-upon social objective function is positive. The results show that the hegemony index of central bank which consists of a combination of three sub-indexes such as "regional equity", "commitment ordering" and "diversity of economic activities" is relatively low and needs to be increased to ensure economic stability.