Performance of Monetary Policy Under the Interest Free Banking Law in Iran, (1972-2010)

The conventional wisdom in economic theory prescribes that the major role of the Central Bank is to design and conduct active monetary policy aiming at curbing inflation and achieving the price stability. After half a century of endeavors in attaining this target, Central Bank of the Islamic Republic of Iran has gone through tumultuous periods gaining mixed results in its efforts. The assessment of the performance of the Central Bank of the Islamic Republic of Iran (CBI) is also important from another aspect which is the experience of Central Bank in implementation of Shariah-based Islamic banking in Iran. The Usury (interest) Free Banking Law of Iran was legislated a few years after the Islamic Revolution of 1979 and opened a new horizon in the banking practices in Iran. Since the main purpose of this study is to evaluate and compare the performance of the central Bank of Iran primarily on inflation rate under the two specific Money and Banking Laws, therefore, we will not deal explicitly with the theoretical aspects of the issue. In another word, we assume that the monetary authority has attempted to conduct the monetary policy on the basis of theoretical foundations to achieve low and stable inflation rate. We conclude that in the review period (1972-2010), except for the 3rd Plan period (1379-1383 (2000-2005)), Central Bank of the Islamic Republic of Iran has not had an acceptable progress in attaining the aims of monetary policy. Also, in this study we will analyze challenges ahead of efficient implementation of monetary policy in Iran.