The Behavior of Monetary Policy during the Business Cycle in the Iran Using DSGE Model

Alireza Erfani () and Neda Kasaipour ()
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Alireza Erfani: Associate Professor of Economics, Semnan University
Neda Kasaipour: Ph.D. Student in Economics, Semnan University

Quarterly Journal of Applied Theories of Economics, 2019, vol. 5, issue 4, 53-80

Abstract: The countercyclical monetary policy is a policy that economists recommend to decrease the economic fluctuations. The purpose of this study is to answer the question of how the monetary policy behavior in Iran's economy was and how it should be. To find the right answers, by using a Markov-Switching model, shown that behavior of monetary policy in the Iran during 1991 to 2015 was mainly procyclical. Then, a dynamic stochastic general equilibrium model, according to the structure of the economy, is considered. Then, optimal monetary policy has been calculated in terms of fiscal domination and institutional quality over a business cycle and calibrated using equilibrium parameters. The results show that the optimal monetary policy over the business cycle, monetary policy is counter-cyclical. The optimal monetary policy coefficient during the business cycle decreases with decreasing institutional quality and increased fiscal domination. Also, if the policymaker's goal is only to stabilize inflation, the optimal monetary policy is acyclic. In addition, when a completely independent monetary policy is assumed, the optimal policy coefficient takes the highest value compared to other assumed conditions.

Keywords: Monetary policy; Business cycle; Markov-switching model; DSGE model (search for similar items in EconPapers)
JEL-codes: C22 E52 E58 (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:ris:qjatoe:0126

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