Studying the Strategic Scenarios of Monetary and Fiscal Policies in Iran

The aim of this paper is identifying the appropriate policymaking framework for stabilizing goals of monetary and fiscal policies in Iran’s economy. The behavior of monetary and fiscal policymakers was extracted using dynamic optimization method and leader-follower model of game theory and defining policy makers’ constraints and objective functions under two main policy-making approaches: commitment and discretion. Based on findings, committed policymaking and a leadership central bank lead to increasing economic stability. The importance of stabilizing production and inflation for committed policymakers is more than discretionary policymakers. While for a committed policymaker, stabilization of inflation is more important than stabilization of production, for a discretionary policymaker stabilization of production is more important than stabilization of inflation. Research findings show that the stabilization of public debt for a committed central bank is more important than a discretionary central bank. Also The discretionary fiscal policy have cyclical behavior.