The Behavior of Monetary Policy during the Business Cycle in the Iran Using DSGE Model

Document Type : Research Paper

Authors

1 Associate Professor of Economics, Semnan University

2 Ph.D. Student in Economics, Semnan University

Abstract

The countercyclical monetary policy is a policy that economists recommend to decrease the economic fluctuations. The purpose of this study is to answer the question of how the monetary policy behavior in Iran's economy was and how it should be. To find the right answers, by using a Markov-Switching model, shown that behavior of monetary policy in the Iran during 1991 to 2015 was mainly procyclical. Then, a dynamic stochastic general equilibrium model, according to the structure of the economy, is considered. Then, optimal monetary policy has been calculated in terms of fiscal domination and institutional quality over a business cycle and calibrated using equilibrium parameters. The results show that the optimal monetary policy over the business cycle, monetary policy is counter-cyclical. The optimal monetary policy coefficient during the business cycle decreases with decreasing institutional quality and increased fiscal domination. Also, if the policymaker's goal is only to stabilize inflation, the optimal monetary policy is acyclic. In addition, when a completely independent monetary policy is assumed, the optimal policy coefficient takes the highest value compared to other assumed conditions.

Keywords

Main Subjects

References

  1. Anvari, I., & Zarainejad, M. (2015). Parameters uncertainty and the effects on monetary policy in Iran: a New Keynesian open economics approach. Macroeconomic Journal, 20, 154-134 (In Persian).
  2. Baaziz, Y., & Babidi, M. (2016). Nonlinear monetary policy rules: An essay in the comparative study on Egyptian and Tunisian central banks. Economies, 4 (6), 1-18.
  3. Bayat, M., Afshari, Z., & Tavakoliyan, H. (2017). Monetary policy and total index of stock price within the framework of a DSGE model quarterly. Journal of Economic Research and Policy, 3(78), 178-206 (In Persian).
  4. Calderon, C., Duncan, R., & Schmidt-Hebbel, K. (2016). Do good institutions promote counter-cyclical macroeconomic policies. Oxford Bulletin of Economics and Statistics, 4(6), 49-90.
  5.  Castro, V. (2008). Are central banks following a linear or nonlinear Taylor Rule. NIPE WP 19.              
  6. Coulibaly, B. (2012). Monetary policy in emerging market economies: What lessons from the global financial crisis. International Finance Discussion. 1042.
  7. Deschamps, Ph. J. (2008). Comparing smooth transition and Markov Switching autoregresive models of us unemployment. Journal of Applied Econometrics, 23(4), 435-462.
  8. Duncan, R. (2014). Institutional quality, the cyclicality of monetary policy and macroeconomic volatility. Journal of Macroeconomics, 39, 113–155.
  9. Farazmand, H., Ghorbanzhad, M., & Pourjavan, A. (2013). Determining the rules of optimal monetary and fiscal policy in Iran's economy. Quarterly Journal of Economic Research and Policy, 67, 69-88 (In Persian).
  10. Frankel, J., Vegh, C. A., & Vuletin, G. (2011). Fiscal policy in developing countries: Escape from procyclicality. Vox. (http://www.voxeu.org/article/how-developing-nations-escaped-procyclical-scal-policy).
  11. 11.     Francis, N.  Jacksonz, L. E, & M, T. Owyangx (2017).  Countercyclical policy and the speed of recovery after recessions. Working paper 2013-032E. Federal Reserve Bank Of St. Louis Research Division.
  12.  Erfani, A., & Shamsiyan, H. (2016). Application of Taylor's Rule in Iran economy and policies influence from real estate market. Journal of Management System, 8,197-210 (In Persian).
  13. Gruben, W.C., & Welch, J. (2010). Is tighter fiscal policy expansionary under fiscal dominance: Hypercrowding out in Latin America. contemporary economic policy, Western Economic Association International, 28(2), 171-181.
  14. Jalali Naini, A., & Hemmaty, M. (2013). Threshold effects in the monetary policy reaction function: Evidence from central bank of Iran. Journal of Monetary and Economy, 8(1).
  15. McGettigan, D., Moriyama, M., Ntsama, J., Painchaud, F., & ChSteinberg, H. (2013). Monetary policy in emerging markets: Taming the cycle. IMF Working Paper. WP/13/96.
  16. Nhapulo, G. &  Nicolau, J. (2017). Assessing nonlinear dynamics of central bank reaction function: The case of mozambique. South African. Journal of Economics, 85(1).
  17. Kaminsky, G. L., Reinhart, C., & Vegh, C. (2004). When it rains, it pours: Procyclical capital flows and macroeconomic policies, NBER Macroeconomics , Vol.19.
  18. Kim, J. (2014). Cyclicality of optimal stabilization policy in developing countries under frictions: Role of imperfect infrastructural development, Working Paper.
  19.  KiyaHoseini, S.,  Hashemi, Z., Hatami, A., & Nazariyan, M. (2017). Regulation of Monetary Policy on Economic Growth (Assessment of mccallum rule in Iran), 7, 113-124 (In Persian).
  20.  Komijani, A.,  Elahi, N., &  Salehi Rezveh, M.(2015). Asymmetric effects of the monetary policy on inflation and output gap in Iran: A threshold approach. Quarterly Journal of Economic Growth and Development Research, 78-61 (In Persian).
  21. Hadian, I., & Ostadzad, A. (2015). Calculation of the optimal rate of income tax with and without environmental considerations. Scientific-Research Quarterly Journal of Applied Economic Studies of Iran, 24, 1-25 (In Persian).
  22. Huang, H., & Wei, M. (2006). Monetary policies for developing countries: The role of institutional quality. Journal of International Economics, 70, 239–252.
  23. Houshmand, M., Fallahi, M., & Tavakoli Ghoochani, S. (2008). Analysis of business cycle in Iranian economy using Hadrik Prescott's filter. Journal of Knowledge and Development, 22, 48-23 (In Persian).
  24. Rahmani, T., & Yousefi, H. (2008). Corruption monetary policy, and cross-country examination, Working Paper, 1-18.
  25. Samadi, A. H., Marzban, H., & Sajjadian Fard, N. (2014). Tax evasion, effective tax rate and economic growth in Iran: an endogenous growth model. Proceedings of the 8th Conference on Iranian Tax and fiscal policies. (In Persian).
  26. Shahmoradi, A., &  Sarem, M. (2013). Optimal monetary policy and inflation targeting. Journal of Economic Research, 48, 25-42 (In Persian).
  27. Taqi Nejad, O. (2012).Taylor's expanded rule: A case study of Iran in 1979-86. Quarterly Journal of Economic Modeling Research, 9, 1-19 (In Persian).
  28. Taqavi, M., & Safarzadeh, A. (2009). The optimal rate of growth of liquidity in the economy in the context of New Keynesian dynamic stochastic general equilibrium models. Quarterly Journal of Economic Modeling, 3 (3), 104-77 (In Persian).
  29. Tavakoliyan, H., & Sarem, M. (2017). DSGE models in DYNARE software, modeling, solving and estimating based on Iranian economy (1nd ed.). Tehran, Banking and Monetary Research Center. (In Persian).
  30. Petersen, K. (2007). Does the Federal Reserve follow a non-linear Taylor Rule. Economics Working Papers. 20-37.
  31. Vegh, A., &  Guillermo, V. (2012). The road to redemption: Policy response to crises in Latin America. IMF Economic Review, Palgrave Macmillan, 62(4), 526-568.
  32. Walsh, C. (2010). Monetary Theory and Policy. Massachusetts institute of technology. Third Edition.
  33. Yakhin, Y. (2008). Financial integration and cyclicality of monetary policy in Small open economies. Rice University.
  34. Zhang, X., Liu, X., Hang, M., & Yao, M. (2017). A Regime-Switching approach to estimating the nonlinear quantity-based monetary policy rule in China. Applied Economics Letters, 24 (2).
Quarterly Journal of Applied Theories of Economics
Volume 5, Issue 4 - Serial Number 19
February 2019
Pages 53-80

Files

Share

How to cite

Statistics