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Investigating the effect of institutional quality (corruption) and lack of financial dominance (central bank independence) on optimal monetary policy using DSGE and STAR approaches

Maryam Ghadimi (), Mahnaz Rabiei (), Abdolah Davani () and Abolfazl Shahabadi ()
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Maryam Ghadimi: P.h.d Student of Economics, Islamic Azad University Tehran South Branch
Abdolah Davani: Assistant Professor of Economics and Faculty member of Islamic Azad University
Abolfazl Shahabadi: Professor of Economics and Faculty member of Social& Economic Department Alzahra University

Quarterly Journal of Applied Theories of Economics, 2020, vol. 7, issue 3, 241-280

Abstract: Examining monetary policy as one of the channels affecting macroeconomic variables is one of the important issues in the economy. In the present study, using the nonlinear model of autoregression with gentle transfer (STAR), the effect of corruption on monetary policy with respect to different levels of independence of the Central Bank of Iran has been investigated. The results, in addition to confirming the non-linear relationship between the independence of the Central Bank of Iran and the growth of money supply, show that increasing the degree of independence of the Central Bank has reduced the growth of money supply. Finally, the optimal behavior of optimal monetary policy is determined using the Stochastic Dynamic General Equilibrium (DSGE) model. The results show that fiscal dominance reduces the coefficient of optimal policy and the greatest stabilizing power of optimal monetary policy occurs in the state of complete independence of monetary policy.

Keywords: Central Bank Independence (CBI; Smooth Transition Autoregressive (STAR); Monetary Policy; Corruption; Stochastic Dynamic General Equilibrium Model (DSGE) (search for similar items in EconPapers)
JEL-codes: C22 E52 E58 (search for similar items in EconPapers)
Date: 2020
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