Document Type : Research Paper
Authors
Abstract
Interest rate channel is one of the important transmission paths that affect the real sector of the economy. Review of optimal monetary policy literature shows the existance of relationship between inflation, output gap and interest rate. In addition to disagreements of causality of interest rate and inflation, there are different views on how interest rate affects economic variables. The main objective of this study is to simulate simultaneous control of inflation and out put gap in a minimum interest rate, consist with Islamic economics, using control theory and dynamic stochastic general equilibrium model. Dynare software was used to do the simulation, and Matlab was applied to write the control algorithm code as well as to estimate the controller equation. The result of the study showed that prerequisite for controlling interest rate toward its minimum level is to reduce inflation rate to reach the level of 3 percent during 6 years period.
JEL classification: C01, E12, E52
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