Selecting a Proper Price Setting Model for Iran Economy

Several ways can be used to modeling price adjustment, based on different theories. Due to these differences in assumptions and bases, analyzing monetary policy effects under each approach is quite different. Thereby, having a deep analysis of monetary policy requires a price adjustment model that consistent with economic conditions of the country. This paper, by introducing four model, sticky price (standard new Keynesian model), backward looking model (Phillips curve with adaptive expectations), hybrid new Keynesian and sticky information, shows that with respect to Iran economic data, sticky information model, in describing monetary policy effects, has better performance compare to other models. Moreover, simulation of monetary policy shocks shows that the behavior of inflation and output gap under sticky information model has more consistency with actual effects of monetary policy.