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Stochastic Simulation of Monetary Policy Rule in a Macroeconomic Model Based on Price Rigidity for Iran Economy

Davoudi, Mahboobe | 2015

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  1. Type of Document: M.Sc. Thesis
  2. Language: Farsi
  3. Document No: 46789 (44)
  4. University: Sharif University of Technology
  5. Department: Management and Economics
  6. Advisor(s): Nili, Massoud
  7. Abstract:
  8. Macroeconomic stability, namely reduction in output fluctuations and inflation level and volatility, has been a major policy for policymakers. Therefore the way of choosing monetary policy to achieve the mentioned object has a great importance in macroeconomics literature. Currently, the best known monetary policy models are based on Taylor rule. These rules adjust interest rate with respect to inflation and output deviation from the target to minimize fluctuation in inflation and output. Formerly, McCallum rule was widely used, which adjust growth rate of the money base in response to nominal GDP deviation from the target to minimize nominal GDP fluctuation. To evaluate the performance of these rules in every economy, macroeconomic modeling is needed. In this research, the performance of Taylor and McCallum rule is evaluated, by modeling Iran economy in the framework of macroeconomic models based on price stickiness, with the stochastic simulation method. The results show that applying the Taylor rule decreases fluctuations in real output of the economy from 28.6 percent per quarter to about 2.8 percent. In the monetary sector, average of 4% Changes in currency exchange rates can be reduced to 0.82 and 4.6% inflation in the quarter reduces to 2.8%. Using McCallum rules similar results can be achieved in the real sector as in the Taylor rule and in the monetary sector, The monetary base growth rate of 5.32 percent in seasonally data in Iran economy reduces to 1.98% and thus inflation of 1.98 percent reduced 1.8 in the quarter
  9. Keywords:
  10. Stochastic Simulation ; Euler Equation for Output ; Monetary Policy Rule ; New Keynesian Model ; Calvo Price Riqidity Model ; Taylor Monetary Policy Rule ; Mccallum Monetary Policy Rule

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