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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

Author

Listed:
  • Ghadimi, Maryam

    (P.h.d Student of Economics, Islamic Azad University Tehran South Branch)

  • Rabiei, Mahnaz

    (Assistant Professor of Economics and Faculty member of Islamic Azad University)

  • Davani, Abdolah

    (Assistant Professor of Economics and Faculty member of Islamic Azad University)

  • Shahabadi, Abolfazl

    (Professor of Economics and Faculty member of Social& Economic Department Alzahra University)

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.

Suggested Citation

  • Ghadimi, Maryam & Rabiei, Mahnaz & Davani, Abdolah & Shahabadi, Abolfazl, 2020. "Investigating the effect of institutional quality (corruption) and lack of financial dominance (central bank independence) on optimal monetary policy using DSGE and STAR approaches," Quarterly Journal of Applied Theories of Economics, Faculty of Economics, Management and Business, University of Tabriz, vol. 7(3), pages 241-280, October.
    • Handle: RePEc:ris:qjatoe:0205
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    More about this item

    Keywords

    Central Bank Independence (CBI; Smooth Transition Autoregressive (STAR); Monetary Policy; Corruption; Stochastic Dynamic General Equilibrium Model (DSGE);
    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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