The stability of macro variables and its effects on the regulation of the country's basic commodity market

1- Market regulation consists of a set of rules, policies, measures and strategies that seek to create convergence in the value chain of goods and services in the market and to protect all its agents in line with minimization of risks associated with price and quantity fluctuations bu adopting appropriate policy tools in the field of supply and consumption. These policies are heavily influenced by changes in macroeconomic variables. In this regard, inflation variation can be considered as an important indicator to examine the impact of macro policies on the success or failure of market regulation policies. In general, the inflation trend can be divided into two components: permanent inflation and transient inflation. The permanent component of inflation can be considered as a tool for evaluating macroeconomic policies and the transient component of inflation can be considered as a tool for evaluating market regulation policies. Permanent inflation changes are mainly due to the implementation of macro-policies such as monetary and fiscal policies, and are largely outside the scope of market regulation tasks. Transient inflation depends more on market-related policies.

2- As displayed in figure (1), the major share of inflation in the whole country is related to permanent inflation, while the transient inflation was significant only after the occurrence of currency shocks in 2012 and 2016.

Fig 1. Inflation rate trend, permanent and transient inflation and exchange rate variation

 Source: research calculations


3- In the two years of 2013 and 2018, due to the occurrence of currency shocks in the previous year, the share of transient inflation in total inflation has increased and transient inflation has been zero within these two years due to stability in economic variables, especially exchange rate.

4- Since 1394, based on government enactments, the increase in prices in the market regulation working group has rarely been higher than 10% and the inflation rate has been reduced below 10% due to the stability in other variables. Based on this, it can be stated that within the years characterized by exchange rate stability market regulation policies have been able to reduce total inflation. In this regard, it is necessary to pay attention to the fact that part of the jump in the exchange rate itself is due to Cost-Push Inflation, Demand-Pull Inflation, as well as structural limitations and its misadjustment over the years.

5- Despite the decline in inflation until 1396, in the face of the exchange rate shock in 1397 even various market regulation-related policies could not restrain the growth of market prices in goods subject to pricing, thereby further widening the gap between market prices and regulated prices. These increases have sometimes led to multiple series of price-setting and higher regulated prices for some goods due to rising costs.

6- As shown in Figure (1), exchange rate shocks have a seriously affects the market with a 3-month lag, and its effects last more than a year. With the currency jump, the efficiency of market regulation policies, including preferential exchange rates and approved prices for basic goods, has declined to some extent, while the multiplicity of government interventions in the market has increased which can lead to rent-seeking behavior.

Key Points

1. Macro-policies, especially in terms of exchange rate variation, have a serious impact on permanent inflation and transient inflation (related market regulation policies).

2- Considering that the effects of any currency shock on the goods and services market can last up to one year, it has led to the multiplicity of government interventions in the market, which will lead to rent-seeking behavior.

3. Market regulation policies can help reduce permanent inflation, but without stability in macroeconomic variables, especially exchange rates, market regulation policies alone cannot have significant success in controlling the market, especially on prices.

4- It should be noted that currently market regulation in the country is facing three main challenges, including instability of macroeconomic variables, non-implementation of sectoral policies and institutional and structural shortcomings in regulating the country's market. Therefore, as a requirement for reforming monetary, fiscal, and foreign exchange policies and coordinating these policies with market regulation policies, the correct formulation and implementation of sectoral policies and restructuring of the market regulation institution should be a priority.


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