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

Author

Listed:
  • Erfani, Alireza

    (Associate Professor of Economics, Semnan University)

  • Kasaipour, Neda

    (Ph.D. Student in Economics, Semnan University)

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.

Suggested Citation

  • Erfani, Alireza & Kasaipour, Neda, 2019. "The Behavior of Monetary Policy during the Business Cycle in the Iran Using DSGE Model," Quarterly Journal of Applied Theories of Economics, Faculty of Economics, Management and Business, University of Tabriz, vol. 5(4), pages 53-80, February.
    • Handle: RePEc:ris:qjatoe:0126
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    More about this item

    Keywords

    Monetary policy; Business cycle; Markov-switching model; DSGE model;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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