Monetary Policy Rule in Iran with Emphasis on Exchange Rate and Money Base

This study examines the monetary policy rule of the Central Bank of Iran regarding exchange rate policy and monetary base. Since the rule of monetary policy is flexible to the economic conditions and the regime governing policy variables, the Markov regime transmission approach has been used to derive the rule of monetary policy in the period 1384:1-1397:1. The results show that the output gap in the low regimes of exchange rate has a positive and significant effect and in the high regimes has a negative and significant effect, and the inflation gap in the high exchange rate regime has a positive and significant effect and in the low exchange rate regime the exchange rate does not have a significant effect. On the low regimes of exchange rate, the government's budget deficit has a positive and significant effect and does not have a significant effect on the high regimes. Also, the output gap has a positive and significant effect in the low and high levels of its value. Monetary regime, and the inflation gap in the high levels of monetary base has a negative and significant effect, and in the lower regimes it has a positive and significant effect. Based on these results, it is recommended that the central bank pay attention to monetary and exchange rate behavioral regimes in implementing foreign exchange and monetary policies and adopt appropriate monetary and exchange rate policies in each regime, depending on the circumstances.