On the Impact of Inflation Uncertainty on Monetary Policy and Employment in Iran between the Years 1975 and 2010

One of the ways to combat unemployment is paying attention to monetary policies. The present study investigates the effects of monetary policy on employment in conditions of uncertainty about inflation. To this end, annual data between the year 1975 and 2010 has been used. In this study, inflation is measured in three ways (difference of CPI level, CPI logarithm, and implicit price index). In this regard, 252 equations have been evaluated under various scenarios (36 equations without inflation uncertainty factor and 216 equations with inflation uncertainty factor). In the model without inflation uncertainty factor, the results indicate that monetary policy affects unemployment. This means the increase in liquidity and cash flow decreases unemployment and vice versa. Similarly, the model in which inflation uncertainty is considered shows that unemployment is affected by monetary policies; in other words, the presence of inflation uncertainty factor in the model neutralizes some of the effects of these policies. In addition, the results indicate that there is a significant direct relationship between inflation uncertainty and unemployment; as the increase in inflation uncertainty leads to an increase in unemployment.These results confirm Friedman’s hypothesis claiming that an increase in inflation uncertainty leads to an increase in unemployment.

Keywords:

Monetary policy , unemployment , inflation uncertainty , GARCH methods , GMM method