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

Document Type : RESEARCH PAPER

Authors

1 Ph.D. Candidate in Economics, Department of Economics, Faculty of Economics, Allameh Tabataba’i University, Tehran, Iran

2 Department of Economics, Faculty of Economics, Allameh Tabataba’i University, Tehran, Iran

3 Professor, Department of Economics, Faculty of Economics, Allameh Tabataba’i University, Tehran, Iran

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

Amisano G, Tronzano M. 2010. Assessing european central bank’s credibility during the first years of the eurosystem: A bayesian empirical investigation. The Manchester School 78: 437–459. DOI: doi.org/10.1111/j.1467-9957.2010.02203.x

Barro, R. J., & Gordon, D. B. (1983). Rules, discretion and reputation in a model of monetary policy. Journal of Monetary Economics, 12(1), 101–121.  DOI:  doi.org/10.4159/harvard.9780674418950.c4

Blinder, A. S. (1998). Central Banking in Theory and Practice. MIT Press. ISBN:  0-262-02439-X (hb: alk. paper), 0-262-52260-8 (pb)

Cakmakli, C., & Demiralp, S. (2020). A dynamic evaluation of central bank credibility. Central Bank Review, 20(1), 1–12.

Cecchetti, S., & Krause, S. (2002). Central bank structure, policy efficiency, and macroeconomic performance: Exploring empirical relationships. Review, Federal Reserve Bank of St. Louis, 84(4), 47–59. DOI:  10.20955/r.84.47-60

Central Bank of the Islamic Republic of Iran. (2021, 2022). Monetary and Credit Policies Report. https://cbi.ir/ [In Persian]

Clarida, R., Gali, J., & Gertler, M. (1999). The Science of Monetary Policy: A New Keynesian Perspective. Journal of Economic Literature, 37, 1661-1707. DOI: https://doi.org/10.1257/jel.37.4.1661

Cogley, T., & Sargent, T. J. (2005). Drifts and volatilities: Monetary policies and outcomes in the post WWII U.S. Review of Economic Dynamics, 8(2), 262–302.  DOI: 10.1016/j.red.2004.10.009

Cukierman, A. (1992). Central Bank Strategy, Credibility, and Independence: Theory and Evidence. MIT Press.DOI: doi.org/10.2307/2939099

Demertzis, M., & Viegi, N. (2008). Inflation Targets as Focal Points. International Journal of Central Banking 4(1):55. DOI: 10.2139/ssrn.832405

  Edwards, S., & Savastano, M. A. (2000). Exchange rates in emerging economies: What do we know? What do we need to know? NBER Working Paper No. 7228. DOI:  doi.org/10.3386/w7228

Eijffinger, S C W & Hoeberichts, M M (2008) The trade-off between central bank independence and conservatism in a new Keynesian framework. European Journal of Political Economy, vol. 24, no. 4, pp. 742-747. DOI: doi.org/10.1016/j.ejpoleco.2008.06.001

Erfani, A., & Taleb-Bidokhti, A. (2018). Examining the role of bank credit and monetary policymaker credibility in financial stability in the Iranian economy .Economic Research and Policies, 26(85), 219–241. [In Persian].

Fama, E. F. (1976). Forward rates as predictors of future spot rates. Journal of Financial Economics, 3(4), 361-377. DOI: 10.1016/0304-405X(76)90027-1

Fisher, I. (1930). The Theory of Interest. Macmillan. DOI: doi.org/10.2307/1883901

Fraga, A., Goldfajn, I., & Minella, A. (2003). Inflation targeting in emerging market economies. NBER Working Paper No. 10019. DOI: doi.org/10.3386/w10019

Gelman, A., Carlin, J. B., Stern, H. S., Dunson, D., Vehtari, A., & Rubin, D. B. 2013. Bayesian data analysis (3rd ed.). CRC Press.
DOI: https://doi.org/10.1201/b16018

Goodfriend, M. (1993). Interest rate policy and the inflation scare problem:1979–1992. Federal Reserve Bank of Richmond Economic Quarterly, 79(1), 1–24.  

Güler, A. (2021). Does Monetary Policy Credibility Help in Anchoring Inflation Expectations? Evidence from Six Inflation Targeting Emerging Economies. Journal of Central Banking Theory and Practice, 2021, 1, pp. 93-111. DOI: 10.2478/jcbtp-2021-0005

Harvey, A. C., (2013). Dynamic Models for Volatility and Heavy Tails. Cambridge University Press.  DOI: doi.org/10.1017/CBO9781139540933

Hemmati, M., Tabrizy, S. S., & Tarverdi, Y. (2023). Inflation in Iran: An empirical assessment of the key determinants. Journal of Economic Studies, 50 (8), 1710–1729. DOI: doi.org/10.1108/jes-07-2022-0370

Jalali Naeini, S. A. R., & Seighalani, S. (2023). External Shocks, Cost Push and Stagflation in Iran. Journal of Economic and Planning Research, 28(2), 45–89. DOI:  doi.org/10.61186/jpbud.28.2.45

Kalemli-Özcan, Ş., & Ünsal, F. (2024). Global Transmission of FED Hikes: The Role of Policy Credibility and Balance Sheets National bureau of economic research DOI: 10.3386/w32329

Kim, S., Shepherd, N., & Chib, S. (1998). Stochastic volatility: Likelihood inference and comparison with ARCH models. The Review of Economic Studies, Volume 65, Issue 3, July 1998, Pages 361–393. DOI: https://doi.org/10.1111/1467-937X.00050

Kamal, A., & Taghinejad Omran, V. (2023). Investigating the effect of central bank credibility on interest rates with emphasis on financial and institutional factorsIranian Economic Research, 28(94), 81–126. [In Persian]. DOI: https://doi.org/10.22054/ijer.2023.66803.1080

Köse, N., & Süt, A. T. (2025). An implicit credibility index for the central banks that implemented inflation-targeting regime. Journal of Central Banking Theory and Practice, 14(2), 63–90. DOI: 10.2478/jcbtp-2025-0014

Kydland, F. E., & Prescott, E. C. (1977). Rules rather than discretion: The inconsistency of optimal plans. Journal of Political Economy, 85(3), 473–491. DOI: doi.org/10.23865/magma.v7.1377

Levieuge, G., Lucotte, Y., & Ringuedé, S. (2018). Central bank credibility and the expectations channel: evidence based on a new credibility. Review of World Economics 154(417) 535 . DOI: 10.1007/s10290-018-0308-6

Mackiewicz-Łyziak, J. (2016). Central Bank Credibility: Determinants and Measurement. A Cross-Country Study. Acta Oeconomica,Vol. 66 (1), pp. 125–151. DOI:  doi.org/10.1556/032.2016.66.1.

     Mankiw, N. G. (2003). Macroeconomics (5th ed.). Modern         Economy, Vol.1 No.2. ISBN: 0716752379

Marzban, H. (2024). Inflationary Effects of the Foreign Currency Shocks with Different Sources: The Response of Monetary Policy in a Developing Economy. Iranian Economic Review, 28(3), 695–729. DOI: https://doi.org/10.22059/ier.2024.334485.1007328

Mendonça, H. F. de, & Souza, G. J. de G. e. (2009).
Inflation targeting credibility and reputation: The consequences for the interest rate. Economic Modelling, 26(6), 1228–1238. DOI: doi.org/10.1016/j.econmod.2009.05.007

Mishkin, F. S. (2006). Monetary Policy Strategy: How did we get here? MIT Press. DOI: doi.org/10.3386/w12515

Montes, G. C., & Bastos, J. C. (2014). Effects of reputation and credibility on monetary policy: theory and evidence for Brazil. Journal of Economic Studies 41(3). DOI: 10.1108/JES-11-2012-0158

Orphanides, A. (2003). Monetary Policy in Deflation: The Liquidity Trap in History and Practice. The North American Journal of Economics and Finance 15(1):101-124. DOI: 10.1016/j.najef.2003.12.001

Primiceri, G. E. (2005). Time varying structural vector autoregressions and monetary policy. Review of Economic Studies, 72(3), 821–852. DOI: doi.org/10.2139/ssrn.352960

Raeisi, R., Armen, S. A., & Anvari, A. (2025). Investigating the effects of central bank credibility and economic policy uncertainty on stock market returns under sanctions Journal of Development and Capital, 11(2). [In Persian]. DOI:  https://doi.org/10.22103/JDC.2025.25551.1567

Romer, C. D., & Romer, D. H. (2000). Federal Reserve information and the behavior of interest rates. American Economic Review, 90(3), 429–457. DOI:10.3386/w5692

Svensson LE. 1993. The simplest test of inflation target credibility. Working Paper 4604, National Bureau of Economic Research. . DOI: doi.org/10.3386/w4604

Tronzano M. 2005. Inflation targeting and credibility: a note on the recent empirical literature. Economia Internazionale/International Economics 58: 489–506.

Woodford, M. (2003). Interest and prices: Foundations of a theory of monetary policy. Princeton University Press. DOI: doi.org/10.2307/j.ctv30pnvmf

References

Amisano G, Tronzano M. 2010. Assessing european central bank’s credibility during the first years of the eurosystem: A bayesian empirical investigation. The Manchester School 78: 437–459. DOI: doi.org/10.1111/j.1467-9957.2010.02203.x
Barro, R. J., & Gordon, D. B. (1983). Rules, discretion and reputation in a model of monetary policy. Journal of Monetary Economics, 12(1), 101–121.  DOI:  doi.org/10.4159/harvard.9780674418950.c4
Blinder, A. S. (1998). Central Banking in Theory and Practice. MIT Press. ISBN:  0-262-02439-X (hb: alk. paper), 0-262-52260-8 (pb)
Cakmakli, C., & Demiralp, S. (2020). A dynamic evaluation of central bank credibility. Central Bank Review, 20(1), 1–12.
Cecchetti, S., & Krause, S. (2002). Central bank structure, policy efficiency, and macroeconomic performance: Exploring empirical relationships. Review, Federal Reserve Bank of St. Louis, 84(4), 47–59. DOI:  10.20955/r.84.47-60
Central Bank of the Islamic Republic of Iran. (2021, 2022). Monetary and Credit Policies Report. https://cbi.ir/ [In Persian]
Clarida, R., Gali, J., & Gertler, M. (1999). The Science of Monetary Policy: A New Keynesian Perspective. Journal of Economic Literature, 37, 1661-1707. DOI: https://doi.org/10.1257/jel.37.4.1661
Cogley, T., & Sargent, T. J. (2005). Drifts and volatilities: Monetary policies and outcomes in the post WWII U.S. Review of Economic Dynamics, 8(2), 262–302.  DOI: 10.1016/j.red.2004.10.009
Cukierman, A. (1992). Central Bank Strategy, Credibility, and Independence: Theory and Evidence. MIT Press.DOI: doi.org/10.2307/2939099
Demertzis, M., & Viegi, N. (2008). Inflation Targets as Focal Points. International Journal of Central Banking 4(1):55. DOI: 10.2139/ssrn.832405
  Edwards, S., & Savastano, M. A. (2000). Exchange rates in emerging economies: What do we know? What do we need to know? NBER Working Paper No. 7228. DOI:  doi.org/10.3386/w7228
Eijffinger, S C W & Hoeberichts, M M (2008) The trade-off between central bank independence and conservatism in a new Keynesian framework. European Journal of Political Economy, vol. 24, no. 4, pp. 742-747. DOI: doi.org/10.1016/j.ejpoleco.2008.06.001
Erfani, A., & Taleb-Bidokhti, A. (2018). Examining the role of bank credit and monetary policymaker credibility in financial stability in the Iranian economy .Economic Research and Policies, 26(85), 219–241. [In Persian].
Fama, E. F. (1976). Forward rates as predictors of future spot rates. Journal of Financial Economics, 3(4), 361-377. DOI: 10.1016/0304-405X(76)90027-1
Fisher, I. (1930). The Theory of Interest. Macmillan. DOI: doi.org/10.2307/1883901
Fraga, A., Goldfajn, I., & Minella, A. (2003). Inflation targeting in emerging market economies. NBER Working Paper No. 10019. DOI: doi.org/10.3386/w10019
Gelman, A., Carlin, J. B., Stern, H. S., Dunson, D., Vehtari, A., & Rubin, D. B. 2013. Bayesian data analysis (3rd ed.). CRC Press.
DOI: https://doi.org/10.1201/b16018
Goodfriend, M. (1993). Interest rate policy and the inflation scare problem:1979–1992. Federal Reserve Bank of Richmond Economic Quarterly, 79(1), 1–24.  
Güler, A. (2021). Does Monetary Policy Credibility Help in Anchoring Inflation Expectations? Evidence from Six Inflation Targeting Emerging Economies. Journal of Central Banking Theory and Practice, 2021, 1, pp. 93-111. DOI: 10.2478/jcbtp-2021-0005
Harvey, A. C., (2013). Dynamic Models for Volatility and Heavy Tails. Cambridge University Press.  DOI: doi.org/10.1017/CBO9781139540933
Hemmati, M., Tabrizy, S. S., & Tarverdi, Y. (2023). Inflation in Iran: An empirical assessment of the key determinants. Journal of Economic Studies, 50 (8), 1710–1729. DOI: doi.org/10.1108/jes-07-2022-0370
Jalali Naeini, S. A. R., & Seighalani, S. (2023). External Shocks, Cost Push and Stagflation in Iran. Journal of Economic and Planning Research, 28(2), 45–89. DOI:  doi.org/10.61186/jpbud.28.2.45
Kalemli-Özcan, Ş., & Ünsal, F. (2024). Global Transmission of FED Hikes: The Role of Policy Credibility and Balance Sheets National bureau of economic research DOI: 10.3386/w32329
Kim, S., Shepherd, N., & Chib, S. (1998). Stochastic volatility: Likelihood inference and comparison with ARCH models. The Review of Economic Studies, Volume 65, Issue 3, July 1998, Pages 361–393. DOI: https://doi.org/10.1111/1467-937X.00050
Kamal, A., & Taghinejad Omran, V. (2023). Investigating the effect of central bank credibility on interest rates with emphasis on financial and institutional factorsIranian Economic Research, 28(94), 81–126. [In Persian]. DOI: https://doi.org/10.22054/ijer.2023.66803.1080
Köse, N., & Süt, A. T. (2025). An implicit credibility index for the central banks that implemented inflation-targeting regime. Journal of Central Banking Theory and Practice, 14(2), 63–90. DOI: 10.2478/jcbtp-2025-0014
Kydland, F. E., & Prescott, E. C. (1977). Rules rather than discretion: The inconsistency of optimal plans. Journal of Political Economy, 85(3), 473–491. DOI: doi.org/10.23865/magma.v7.1377
Levieuge, G., Lucotte, Y., & Ringuedé, S. (2018). Central bank credibility and the expectations channel: evidence based on a new credibility. Review of World Economics 154(417) 535 . DOI: 10.1007/s10290-018-0308-6
Mackiewicz-Łyziak, J. (2016). Central Bank Credibility: Determinants and Measurement. A Cross-Country Study. Acta Oeconomica,Vol. 66 (1), pp. 125–151. DOI:  doi.org/10.1556/032.2016.66.1.
     Mankiw, N. G. (2003). Macroeconomics (5th ed.). Modern         Economy, Vol.1 No.2. ISBN: 0716752379
Marzban, H. (2024). Inflationary Effects of the Foreign Currency Shocks with Different Sources: The Response of Monetary Policy in a Developing Economy. Iranian Economic Review, 28(3), 695–729. DOI: https://doi.org/10.22059/ier.2024.334485.1007328
Mendonça, H. F. de, & Souza, G. J. de G. e. (2009).
Inflation targeting credibility and reputation: The consequences for the interest rate. Economic Modelling, 26(6), 1228–1238. DOI: doi.org/10.1016/j.econmod.2009.05.007
Mishkin, F. S. (2006). Monetary Policy Strategy: How did we get here? MIT Press. DOI: doi.org/10.3386/w12515
Montes, G. C., & Bastos, J. C. (2014). Effects of reputation and credibility on monetary policy: theory and evidence for Brazil. Journal of Economic Studies 41(3). DOI: 10.1108/JES-11-2012-0158
Orphanides, A. (2003). Monetary Policy in Deflation: The Liquidity Trap in History and Practice. The North American Journal of Economics and Finance 15(1):101-124. DOI: 10.1016/j.najef.2003.12.001
Primiceri, G. E. (2005). Time varying structural vector autoregressions and monetary policy. Review of Economic Studies, 72(3), 821–852. DOI: doi.org/10.2139/ssrn.352960
Raeisi, R., Armen, S. A., & Anvari, A. (2025). Investigating the effects of central bank credibility and economic policy uncertainty on stock market returns under sanctions Journal of Development and Capital, 11(2). [In Persian]. DOI:  https://doi.org/10.22103/JDC.2025.25551.1567
Romer, C. D., & Romer, D. H. (2000). Federal Reserve information and the behavior of interest rates. American Economic Review, 90(3), 429–457. DOI:10.3386/w5692
Svensson LE. 1993. The simplest test of inflation target credibility. Working Paper 4604, National Bureau of Economic Research. . DOI: doi.org/10.3386/w4604
Tronzano M. 2005. Inflation targeting and credibility: a note on the recent empirical literature. Economia Internazionale/International Economics 58: 489–506.
Woodford, M. (2003). Interest and prices: Foundations of a theory of monetary policy. Princeton University Press. DOI: doi.org/10.2307/j.ctv30pnvmf

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