Energy price reform and optimal monetary policy: DSGE approach

The aim of this study is to design a dynamic stochastic general equilibrium model to consider the effects of energy price reform on macroeconomic and optimal reaction of central bank in Iran. In this regard, we design a dynamic stochastic general equilibrium model for economy of Iran, so that energy is included in the household bundle as a separate commodity and in the production function as an input. To investigate the role of monetary Authority, first, we used a reaction function for the central bank, so that indicating the discretionary behavior of central bank. Using calibration and solving the model, the effects of energy price shock on macroeconomic variables were investigated. To evaluate the optimal response of the central bank to the energy price shock, optimal monetary rule is obtained using stochastic optimal control. Finally, by substituting the optimal rule rather than the central bank reaction function, the impact of energy price shock is investigated. The results indicate that the central bank can use the optimal monetary policy rule have better responses to energy price shock and reduce the effect of its stagflation.