The impacts of risk premium monetary and oil policies, supply and demand on the exchange rate and inflation in Iran under the the Taylor and Mccallum rules

The study of the sources of exchange rate fluctuation is of great importance to the monetary authorities of a country. In the present study, Taylor and Mccallum rules are used to examine exchange rate fluctuations, including the impulses of oil, the impulses of risk premium, the impulses of supply, the impulses of demand, and the impulse of monetary policy in a structural vector auto-regressive framework in the period 1991:1-2017:4. The results of the shock reaction indicate that the exchange rate reaction to the impulses of risk, demand and monetary policy is positive but negative to the impulse of oil. This result is the same according to both Taylor and Mccallum rules, although there are differences in the size of the reaction. The exchange rate reaction to the impulses of supply is negative in the Taylor model and positive in the Mccallum model. The results of variance decomposition also show that, in the Taylor model, the demand and monetary policy shocks, and, in the Mccallum model, the risk premium shock have the largest share in the exchange rate fluctuation. In this study, Taylor and Mccallum models are compared, and it is concluded that the Mccallum rule is more powerful than the Taylor rule in Iran's economy to control the impulses. Indeed, due to the fixed interest rate system, the interest rate mechanism is not effective in the Iranian economy, but the liquidity control policy is a rational policy.