Hossein Tavakolian; Ahmadreza Jalali Naeeni
Abstract
Macroeconomic equilibrium depends on both current and future behaviour of the monetary authority. Policymaker can manage economic agents' expectation by determining a specific rule in monetary policy and commit to it. There is a vast literature on central banks incentive in instrument and target choice ...
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Macroeconomic equilibrium depends on both current and future behaviour of the monetary authority. Policymaker can manage economic agents' expectation by determining a specific rule in monetary policy and commit to it. There is a vast literature on central banks incentive in instrument and target choice in monetary economics. According to this literature, this paper studies discretionary and Ramsey optimal monetary policies for Iran in a small open economy dynamic stochastic general equilibrium model which is modified to capture the properties of the economy of Iran. The empirical results show that if there is a commitment to targets, monetary authority can control inflation. However, if the authority implements discretionary monetary policy, despite having two policy instruments of monetary base growth rate and nominal exchange rate depreciation, central bank could not manage expectations and would face inflation bias and higher volatilities.
Maryam Hematy; Ahmad Reza Jalali Naini
Volume 16, Issue 49 , February 2012, , Pages 205-239
Abstract
Achieving price stability is known as one of the tasks and objectives of policy makers especially in central banks. In order to implement inflation targeting policy, the information relating to the response of prices to monetary policy shocks is essential for monetary policy makers. Most studies analyze ...
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Achieving price stability is known as one of the tasks and objectives of policy makers especially in central banks. In order to implement inflation targeting policy, the information relating to the response of prices to monetary policy shocks is essential for monetary policy makers. Most studies analyze the response of aggregate price level like CPI or consumption deflator to monetary shocks. Moreover, a limited number of studies that examine the effect of monetary shocks on disaggregate prices use vector auto regression models for the analysis. The results of these studies show that some disaggregated prices increase slightly in response to a contractionary monetary shocks. This finding which is inconsistent with the standard theory is known as the "price puzzle" in literature. In this paper we use a factor Augmented VAR framework to examine the impulse response function of 12 categories of CPI to one standard error in money base growth rate in Iran. Our two main findings are: 1) monetary shocks have a lagged effect on disaggregated prices and most prices response to a monetary shock with a considerable delay. 2) There is a substantial difference amongst 12 CPI sub-categories in response to an increase in monetary base growth rate. However, the impulse response functions of disaggregated prices are not statistically significant based on bootstrap confidence interval. Contrary to existing studies based on standard VAR model, by using FAVAR approach, we also find that price responses don’t display a price puzzle in the case of Iran.
