Authors

• Morteza Khorsandi ¹
• Karim Eslamloueyan ²
• Hossein Zonnoor ²

¹ Ph.D in Economics, Faculty of Economics, Allameh Tabatabaie University

² Associate Professor in Economic, Shiraz University University

Abstract

The main goal of this paper is to derive an optimal rule for monetary policy in Iran. To do so, we estimate the monetary transmission equations and derive the optimal rule by using the dynamic programming method. Our dynamic optimization problem is to minimize the central bank's loss function subject to the transmission mechanism equations. We have modified our loss function to include inflation persistence as well. Using the growth rate in broad definition of money, M2 as our control variable, we estimate the transmission mechanism equations and derive the optimal monetary rule. Our findings indicate that the optimal monetary policy rule can decrease welfare losses and hence is a welfare improving policy. This means that the use of monetary rule is superior to discretionary policy in the case of Iran.
 

Keywords

• Rule versus discretion
• Optimal monetary policy rule
• Inflation Persistence
• Dynamic Programming
• Iran