A Review of Monetary Policy Tools in Crisis Conditions and Recommendations for Iran’s Economy in Wartime
The economy of every country is influenced by various factors, among which monetary policy is one of the most important. Under normal conditions, the goal of monetary policy is to maintain price stability and regulate the level of liquidity. In times of crisis, especially during war, these policies face serious challenges. War not only transforms the economic and social structure, but also makes it necessary to reconsider existing economic and financial approaches. Governments must intervene and establish new priorities in order to meet urgent societal needs while also striving to maintain economic stability. In this context, examining monetary policy in wartime conditions becomes an essential requirement.
Monetary Policy Tools in Crisis Conditions
- Inflation and Inflation Targeting During Wartime
During war, inflation rises due to lower productivity and higher essential goods demand; monetary policy becomes less effective and governments rely on controls and rationing.
- The Role of Government and Budget Financing
War increases fiscal deficits, weakening monetary policy; governments often turn to monetary financing despite inflation risks.
Mechanism of Implementing Monetary Policy in Crisis Conditions
In wartime conditions, the central bank operates in a unique environment marked by economic disruptions and recession, where conventional monetary policy tools lose their effectiveness; therefore, there is a need to rely on unconventional and flexible instruments to manage the economy.
Mechanism of Implementing Monetary Policy in Crisis Conditions
In war, traditional tools fail, and the central bank must rely on flexible, unconventional policies.
Quantitative Easing and the Purchase of Government Assets
QE helps stabilize markets and lower rates during war but must be temporary and carefully supervised to avoid bubbles.
Targeted Long term Refinancing Operations (TLTRO)
TLTRO channels cheap credit to critical sectors during war but requires tight monitoring.
Maintaining the Policy Interest Rate at a Low Level
Low policy rates stimulate borrowing and consumption during war but may weaken banks if maintained too long.
Experience of Economic Policies with a Focus on Monetary Policy in War Affected Countries
War compels countries to adopt urgent monetary measures to stabilize their economies and support wartime needs.
Ukraine (NBU):
- Exchange Rate: Initially fixed to prevent volatility, later shifted to a managed float.
- Capital Controls: Restrictions on foreign currency withdrawals to preserve reserves, though boosting the parallel market.
- Interest Rates: Policy rate raised to 25% to control inflation and encourage savings.
Russia (CBR):
- Interest Rates: Increased sharply to 20% to counter inflation, with subsequent adjustments.
- Exchange Rate: Stabilized via rate hikes, currency restrictions, and mandatory conversion of 80% of exporters’ foreign earnings into rubles.
- Banking Support: Emergency liquidity and deposit guarantees to prevent bank failures.
Conclusion: Both countries used aggressive monetary tools to maintain financial stability and mitigate war impacts, but the strategies differed according to domestic challenges and external pressures.
Monetary Policy in Iran’s Economy under Wartime Conditions
In wartime, Iran’s monetary policy should shift from inflation targeting to ensuring debt and currency market stability and financing essential government needs, due to reduced production and increased costs and exchange rate volatility.
This study was conducted at Monetary and Banking Research Institute by Maryam Faraji and Hamid Zamanzadeh in 2025.
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