Robust Monetary Policy in Uncertainty for Iran's Economy by using the Hansen and Sargent Approach

Typically, the objectives of monetary policymakers in different economies include reducing inflation and output gap. To achieve these goals, the monetary authorities should adopt appropriate monetary policies. Since the economic models are facing with uncertainty, the uncertainty should be considered in appropriate monetary policies. We investigate discretionary monetary policy with uncertainty about cost push shock and demand pull shock through the Hansen and Sargent’s robust control approach (2002). We use the dynamic stochastic general equilibrium model where the money growth rate has been introduced as a monetary policy instrument. The robust optimal monetary policy for Iran’s economy in response to cost push shock is more aggressive than the monetary policy with certainty, but in response to demand pull shock, no difference exists between robust optimal monetary policy and monetary policy with certainty. Following an increase in inflation weight and money growth rate weight in policymaker’s loss function, the monetary policy with uncertainty remains still aggressive in response to cost push.