Measuring the Effects of Monetary Policy in Iran: A Factor-Augmented Vector Autoregressive (FAVAR) Approach

The purpose of this research is to assess the effects of monetary policy on Iran’s macroeconomic variables. To do that, using the Factor Augmented Vector Auto-Regressive (FAVAR) approach which contains 110 quarterly variables of macroeconomic from1990:2-2013:1, monetary policies in Iran were evaluated. We used liquidity, monetary base, bank debt and bank credit in the private sector as a monetary tool for measuring the monetary policy regarding the implementation of Riba-free Banking law in Iran. The results show that the impact of monetary policy on output is not clear in the short term. However, the monetary neutrality can be accepted in the long term. Moreover, an expansionary monetary policy has a stability effect on the general price level in the short and long term. Comparing the results of VAR model and FAVAR models and using the FAVAR model shows that there is no “Price Puzzle” in the economy of Iran.