How can optimal monetary policies reduce oil sanctions’ impacts? Evidence from Iran

Countries and international organisations have sought to impose sanctions on Iran since the nationalisation of its oil industry (1951), which have been intensified after the Iranian Revolution (1978–1979). Oil sanctions regarding exports, extraction technology and foreign financing are the most critical ones that have significantly affected Iran’s macroeconomy. The fundamental role of monetary policies in reducing the effects of oil sanctions has always been a concern for the policymakers and monetary experts in the Central Bank of Iran (CBI). Therefore, the purpose of this study is to analyse the impact of monetary policies on Iran’s macroeconomic variables against the backdrop of oil sanctions using the dynamic stochastic general equilibrium model. According to simulation results, with the severe oil sanctions but no optimal monetary policies in place, the country will face an increase in the gross domestic product, exchange rate, inflation rate, household consumption, non-oil exports, budget deficit, and seigniorage, but a decrease in oil production, household and government investment, and domestic and imported production. In the context of oil sanctions, considering the inflation and the output gap simultaneously can reduce the CBI’s losses by replacing the current monetary rule with an optimal monetary policy, especially when the inflation gap is weighted higher than the output gap.