Document Type : Article-Based Dissertations

Authors

1 Islamic Azad of Isfahan(Khorasgan), Isfahan, Iran

2 Economic, Isfahan University, Isfahan, Iran

3 economic, Law & Humanity faculty, Islamic Azad University of Isfahan. Isfahan, Iran

Abstract

The New Keynesian School and its profound impact on dynamic stochastic general equilibrium (DSGE) modelling deeply, as well as the use of concepts such as nominal rigidities, incomplete and imperfect asset markets and monopolistic competition, have made these models an interest to monetary economics researchers, especially central banks. In this study, an estimated model for the Iranian economy has been designed by using these models, and according to the nature of this research, the foreign sector has been added to the model in the form of a trade balance equation. The focus of the research is on the imbalances of monetary and exchange rate policies which have caused an instability in the trade status and a crisis situation in the foreign sector and ultimately shifting the country's economy as a whole, which has been tried to measure and exam in the context of dynamic stochastic general equilibrium models. In order to formulate an appropriate pattern, first the behavioural equations of economic agents have been specified according to the realities of the Iranian economy. Traditionally, an inter-period utility function and a production and profit function have been considered to explain the behaviour of consumers and producers, respectively. These agents want to maximize their profits (utility – profit) or the goal function. The outer sector is added to the model as a trade balance (net exports) which is the key function. Policy making is operated via the optimum simple rule and under three alternative monetary regimes: Managed Exchange Rate (MER), Floating Exchange Rate (FER) and Pegged Exchange Rate (PER) regime. The monetary authority (central bank) has designed four methods for applying the mentioned policies: inflation target, production target, production and inflation target and finally inflation, production and real exchange rate target. The analyzed variables are production gap, country’s trade balance (without oil), inflation rate and real exchange rate. Policy tools of bank interest rates are central bank’s foreign assets and the exchange rate in nominal currency. After designing and adjusting the estimated model for the Iranian economy and determining the necessary dynamics, the linear equation system was prepared. The effects of monetary and exchange policies on foreign sector variables was analyzed according to the mass of this sector in production and employability and based on model’s dynamic relations. Furthermore, the actions, reactions and influences of these policies on country’s trade balance have been measured in the format of variable fluctuations. The pattern is simulated by using calibrated real data and Dynare software under MATLAB. The results show that Managed Exchange Rate (MER) for all four methods is optimum and the loss of central bank is minimized as much as possible and causes less fluctuations in model’s endogenous variables comparing to the other alternative monetary regimes.

Keywords

Main Subjects