Document Type : Research Article
Authors
1
Department of Industrial Engineering, K. N. Toosi University of Technology, Tehran, Iran
2
Department of Socio - Economic Systems, Industrial engineering faculty , K. N. Toosi University of Technology, Tehran, Iran.
Abstract
Persistent inflation is the greatest persistent problem in economies which have fiscal dominance, structural rigidities and external constraints. Inflation dynamics under the condition of sanctions also takes on distinct characteristics as monetary injections, fiscal pressure, exchange rate volatility and rigidities result in a limited response to traditional policies. Despite extensive research on individual inflation determinants, the endogenous relationships among these factors have received limited attention within an integrated dynamic framework. The paper provides a system dynamics model for Iranian economy for 2011-2035 with a view to illustrate mechanisms for inflation persistence and analyze policy alternatives. The model includes four intertwined sub-systems of fiscal sector, monetary sector, real economy and external sector and take into explicit consideration the impact of sanctions, banking system imbalances, pension fund imbalances and monetization of budget deficits. Causal loop diagram,stock-and-flow formulation in Vensim and calibration based on history Macroeconomic data as well as the test of reproduction of historic behavior to validate the model, results in coefficient of determination of 0.95 for inflation. Policy simulations show that isolated interventions, such as fiscal discipline or monetary tightening, generate only temporary reductions in inflation. In contrast, a coordinated policy package combining partial sanctions relief, productivity improvements, expectations management, fiscal-monetary coordination, and structural reforms produces substantially better outcomes. Under the most effective scenario, inflation declines by approximately 22 percentage by 2035, accompanied by higher GDP growth and sustained foreign-exchange reserve accumulation. The feedback structures, cumulating processes and time lags involved explain why traditional policy recipes fail in the case of fiscal dominant, sanctioned driven economies. This model can serve as a practical guide for tracing the trade-offs between long term policies and be applied in other resource-driven developing countries with institutional and external constraints.
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