The Optimal Ramsey Monetary Policy in The Form of DSGE Model Appropriate to Oil-Exporting Country (The Case of Iran)

The purpose of this study, regarding the characteristics of an oil economy such as Iran, is to choose the Ramsey optimal monetary policy and appropriate exchange rate system. The model includes Ricardian and non-Ricardian households, nominal rigidity (in price level and wages) and real rigidity (in consumption), public goods, oil and non-oil exports, different exchange systems (float, managed floating, and fixed), and different targets in the real and monetary sector for the central bank. Also, the consequences of implementing the Ramsey optimal monetary policy versus the current state of the country were examined. Finally, the effects of oil prices shocks, foreign inflation shock, money supply shock, and nominal exchange rate growth shocks on macro variables under the base model and Ramsey’s optimal monetary policy were examined. The results show that, first, the central bank should choose and commit to the managed floating exchange rate system among different exchange systems and dual-targeting (production and inflation with more focus on production) among different targeting policies. Although the fixed exchange rate system has a much smaller loss function than others, it is not feasible due to the instability of the economy. Second, the central bank’s commitment to an optimal policy makes the monetary and real sectors of the economy much less volatile and much more stable versus monetary and foreign currency shocks compared to the base model. In faced with external shocks, Ramsey’s optimal monetary policy gives more stability to the real sector of the economy in lieu of more volatility and stability in monetary variables.