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Economic Stability and the Central Bank: Rule or Discretion

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  • Zangeneh, Hamid

Abstract

The history of monetary policy in Iran, judging by their performance in keeping the value of the currency, maintaining a steady growth in the Gross Domestic Product, faltering investment, show that monetary policy has not been a portrait of consistent successes, to say the least. It has been employed in an on-again-off-again manner rather than as a tool for proactive decision making. In this paper the author shows the simulation results for the GDP growth under a regime of fixed monetary rule under different assumptions Comparing the historical changes in the monetary base with a policy rule would highlight the benefits of a response rule. One could see wider fluctuations in the monetary base compare to what was warranted according to the response function. They also show that in most of the cases, monetary base moved the opposite of what should have been done according to the response function. That is, in most years, they reduced the money supply when they should have increased it and increased the money supply when they should have decreased it. At times, it seems that they made a wrong monetary policy and the next year, found their mistake and over compensated for the mistake by overshooting or undershooting.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 26860.

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Date of creation: 2006
Date of revision: 2006
Publication status: Published in Iranian Economic review 16.11(2006): pp. 165-175
Handle: RePEc:pra:mprapa:26860

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Keywords: Monetary rules v. discretion; Monetary policy; Response function; GDP growth and monetary stability;

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  1. Michael J. Dueker & Andreas M. Fischer, 1998. "A guide to nominal feedback rules and their use for monetary policy," Review, Federal Reserve Bank of St. Louis, Federal Reserve Bank of St. Louis, issue Jul, pages 55-63.
  2. Hamburger, Michael J., 1983. "Recent velocity behavior, the demand for money and monetary policy," Proceedings, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, issue Dec, pages 108-128.
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