Estimating Optimal Monetary Policy Rule in Iran based on Hybrid Models

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Jandaghi meybodi Fereshteh; FALAHI MOHAMMAD ALI; FEIZI MAHDI

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Title

Estimating Optimal Monetary Policy Rule in Iran based on Hybrid Models

Author(s)

Jandaghi meybodi Fereshteh | FALAHI MOHAMMAD ALI | FEIZI MAHDI | Issue Writer Certificate

Keywords

central bank preferences optimal monetary rule optimal control linear quadratic dynamic programming Iran EconomyQ1

Abstract

The purpose of this study is to estimate a “ hybrid” version of the optimal monetary policy rule in Iran using the optimal control theory. To do this, it is assumed that monetary authorities solve an optimization problem with regard to the constraints of economic structure, which includes five equations of aggregate supply, aggregate demand, exchange rate, demand for money and government expenditure. First, the structural equations’ parameters are estimated using ordinary least squares (OLS) and seemingly unrelated regression (SUR) methods during 1978-2016. Then, the preferences of the monetary authorities for stabilizing inflation and output, and smoothing liquidity growth are chosen with the aim of minimization of social welfare loss. The results indicate that the central bank should consider the deviation of monetary growth rate and the output gap. In addition, the optimal rule of monetary policy derived from the optimal preferences indicates that the central bank must react simultaneously to the changes in inflation, output gap and real exchange rate, in which the role of output gap is of great importance.

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APA: Copy

Jandaghi meybodi, Fereshteh, FALAHI, MOHAMMAD ALI, & FEIZI, MAHDI. (2019). Estimating Optimal Monetary Policy Rule in Iran based on Hybrid Models. JOURNAL OF SUSTAINABLE GROWTH AND DEVELOPMENT (THE ECONOMIC RESEARCH), 19(3 ), 1-30. SID. https://sid.ir/paper/397698/en

Vancouver: Copy

Jandaghi meybodi Fereshteh, FALAHI MOHAMMAD ALI, FEIZI MAHDI. Estimating Optimal Monetary Policy Rule in Iran based on Hybrid Models. JOURNAL OF SUSTAINABLE GROWTH AND DEVELOPMENT (THE ECONOMIC RESEARCH)[Internet]. 2019;19(3 ):1-30. Available from: https://sid.ir/paper/397698/en

IEEE: Copy

Fereshteh Jandaghi meybodi, MOHAMMAD ALI FALAHI, and MAHDI FEIZI, “Estimating Optimal Monetary Policy Rule in Iran based on Hybrid Models,” JOURNAL OF SUSTAINABLE GROWTH AND DEVELOPMENT (THE ECONOMIC RESEARCH), vol. 19, no. 3 , pp. 1–30, 2019, [Online]. Available: https://sid.ir/paper/397698/en

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