Exchange Rate Pass-Through and the Effects of Monetary Shock in A DSGE Model

The purpose of this study is to study Taylor's theory and investigating the effect of monetary shocks on macroeconomic variables assuming the degree of exchange rate pass-through in different inflationary environments. In this study, the dynamic stochastic general equilibrium model for a small open economy has been used. In this framework, effects of monetary shock were investigated in Iran during 1988:1˗2014:4. and the inflation regimes and the degree of exchange rate pass-through have been investigated using a smooth transmission regression model. The empirical findings show that Taylor's hypothesis is confirmed. In other hands, the degree of exchange rate pass-through is high in an economy with high inflation. Due to a monetary shock, volatility of macroeconomic variables is high, assuming a high degree of exchange rate pass-through in the inflationary environments.