The Internal and External Disequilibrium Relationship in Economy and Extending of Monetary Trilemma (The Case Study of Iran Economy)

The main purpose of this paper is to provide a framework for examining the relationship between internal and external imbalances and their trade-offs based on extending of monetary trilemma that analyzes monetary imbalances with real-sector economic imbalances. The empirical study of this paper examines the theoretical model presented in the context of the system of simultaneous equations for the Iranian economy (OLS and 2SLS). The results of the empirical studies and tests show the validity of the theory presented so that any kind of impulse on the variables of government spending policy, domestic interest rates (deposits and loans), exchange rates, domestic and foreign prices, and foreign interest rates, with other conditions remaining constant. The imbalance is created in the sector concerned, then equilibrium is provided by the transfer and compensation of the imbalance from the sector concerned to the other sectors and the general equilibrium in the economy is restored.