Assessing the Credibility of the Central Bank of Iran under Inflationary Conditions: A Bayesian Regression Approach

Articles in Press

Document Type : RESEARCH PAPER

Authors

1 Faculty of Economics, Allameh Tabataba'i University

2 Faculty of Economics, Allameh Tabataba'i University

Abstract

Tis study evaluates the credibility of the Central Bank of the Islamic Republic of Iran in influencing long-term interest rates, focusing on how effectively it can shape market expectations in an inflationary environment. Credibility is defined as the Bank’s ability to lower long-term rates—used here as a proxy for inflation expectations—through adjustments in short-term monetary policy instruments. The analysis relies on monthly data from March 2021 to October 2025, over which a Bayesian time-varying-parameter regression with Student-t errors is estimated. For each period, the policy effect on the long-term rate is computed posteriorly, allowing the impact to vary flexibly over time. Based on these posterior results, the credibility index is constructed as the probability that the policy effect is negative, meaning that larger index values correspond to greater model-based confidence in a desirable policy outcome.

The empirical findings show that although the average effect of the policy rate on expectations is statistically significant, its quantitative magnitude is economically small. Over the full sample, the credibility index is roughly 0.34, indicating that the Central Bank’s influence on long-term rates is generally weak. A subsequent regime decomposition provides additional insight: during easing periods, the index falls to nearly zero (0.03), implying that reductions in the policy rate did not bring about the expected adjustment in market expectations. By contrast, during tightening periods, the index increases to about 0.50, yet this value still signals substantial uncertainty about the overall effectiveness of policy and offers no decisive evidence that raising the policy rate consistently reduces long-term rate changes. Taken together, the results suggest that the Central Bank exhibits low and unstable credibility in steering inflation expectations throughout the observed period.

Keywords

Stable Economy Journal

Articles in Press, Accepted Manuscript
Available Online from 20 January 2026

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