Inflation Targeting and Nominal GDP Targeting in Monetary Rules for Iran Economy

At present, conducting monetary policies to achieve the central bank's goals is an important problem among policymakers. However most of central banks have used inflation targeting regime, there is a challenging discussion that it should be replaced with nominal GDP targeting. This paper simulates two alternative monetary policy rules, Taylor rule and money growth rate rule, in new Keynesian stochastic dynamic general equilibrium models for Iran economy (1988–2014). Further, it compares the monetary policy regimes: inflation targeting and nominal GDP targeting for each rule. However, neither of these rules has been applied to Iran monetary policy yet, the parameters of the rules are determined in which the moments of simulations approximately equal to the moments of real economy. Analyzing the moments of simulated parameters and comparing them with the real world’s data demonstrate that the presented models are properly matched with both theoretical principles and Iran economy. The results show that interest rate is proper than the money growth rate for affecting the economic real sector variables. Also, in case of applying Taylor rule for monetary policy, NGDP targeting creates more stability on these variables and Inflation targeting creates more stability on inflation.