Optimal Exchange Regim for Iranian economy: DSGE Approach

We compare alternative monetary policies for Iranian economy that This paper compares alternative monetary policy rules for Iranian economy in faces to both internal and external shocks. For this purpose, we investigate the responses of macroeconomic variables respected to the money base and the terms of trade shocks, under three types of monetary rules including fixed exchange rate, inflation targeting and floating of nominal exchange rate at the hard peg through an intermediate exchange rate regime. The results show that the affecting of both shocks on macroeconomic variables is significantly dependent on monetary rules. Accordingly, the intermediate exchange rate regime create higher volatilities in investment and production in both tradable and non tradable sectors, but the reactions of inflation and real exchange rate are convincing. By contrast, the inflation targeting rule induces to lower volatilities in investment, consumption and production, but it tends to higher volatilities of inflation and real exchange rate. Overall, it seems appropriate for Iranian monetary authorities to conduct this rule in the context of an intermediate exchange rate regime, as a preliminary phase before the transition to a floating regime.