The Preferences of Central Bank and Optimal Monetary Policy Rules in Iran based on Backward Looking Models

Document Type : پژوهشی

Authors

• fereshteh jandaghi meybodi
• Mohammad Ali falahi
• Mahdi feizi

Ferdowsi University of Mashhad

https://doi.org/10.22067/pm.v26i17.73879

Abstract

The purpose of this study is to determine the preferences of the central bank of Iran and the optimal monetary policy rule using the optimal control method. so, we assumed that monetary authorities solving an optimization problem in backward looking expectation framework with regard to the constraints of the economic structure, which includes four equations of aggregate supply, aggregate demand, money demand and government expenditures. using Ordinary Least Squares (OLS) and Seemingly Unrelated Regression Method (SUR), for the period of 1979-1397, the preferences of the monetary authorities that minimize the amount of Social welfare losses, were selected. The results indicate that the central bank should consider the deviation of monetary growth rate and then the output gap. Also, the optimal rule of monetary policy derived from the optimal preferences indicates that the central bank must react simultaneously to the changes in inflation, output gap, real exchange rates, government expenditure growth, oil and tax revenues growth.

Keywords

• central bank preferences, optimal monetary rule
• optimal control
• linear quadratic dynamic programming
• central bank of Iran

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