A Comparative Study of the Efficiency of Optimal Monetary Policy in Iran

Sedigheh Gholizadeh Kenari (), Alireza Pourfaraj () and Ahmad Jafari Samimi
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Sedigheh Gholizadeh Kenari: Ph.D. Candidate in Economics, University of Mazandaran
Alireza Pourfaraj: Associate Professor of Economics, University of Mazandaran

Quarterly Journal of Applied Theories of Economics, 2018, vol. 4, issue 4, 27-60

Abstract: Since achieving low and stable inflation alongside economic growth considered as the ultimate goals of central banks and success in macroeconomic performance, on this paper effectiveness of monetary policy in Iran is investigated. In other words, the aim of this study is to determine optimal monetary policy rule to stabilize output gap and inflation deviation. In this way, using Dynamic Programming, monetary policy maker's loss function with respect to monetary transmission mechanism constraints will be minimized and optimal monetary policy rule is extracted. In this paper, to evaluate optimal rule changes during the 1994-2015, the total time period is divided into two periods 1994-2004 and 2005-2015 and the efficiency monetary policy changes in two periods examined and compared. The results of optimization and achieving optimal monetary rule in the first and second period shows the sensitivity of policy makers to deviations of inflation and output gap in the second period has increased than the first period. And also, the reaction of money supply growth rate to output gap was more severe than inflation deviation in the whole period. According to the estimated results, policy makers could increase economic growth in the short term by monetary expansion but should accept higher inflation and lower long-term growth during 2005-2015. In the other words, policy makers obtain benefits by monetary contraction in the form of lower inflation and long-term economic growth.

Keywords: Monetary policy; Dynamic programming; Optimal monetary rule; Iran (search for similar items in EconPapers)
JEL-codes: C41 C61 E52 E58 (search for similar items in EconPapers)
Date: 2018
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