Selecting Proper Monetary Tool in order to Control Fluctuations in Iranian Economy

In this study, we design a DSGE model for Iranian economy in which the government has an active policy for financing budget deficit. Quarterly data in 1388 – 1399 is employed for estimation of structural parameters, where, the diagnosis statistics of model confirm the reliability of results. Using estimated parameters, we analyzed which tool of either policy rate or money base growth rate will be selected by the central bank. To this purpose, the optimal monetary policy is derived for these tools. The simulation results from one percentage point growth in interest rate and one percentage point decline in money base growth rate reveal that using policy rate can control inflation rate and nominal exchange rate more effectively than money base growth rate. In addition, implementing a contractionary policy in the form of policy rate rule reduces private consumption and economic growth less than in the form of money base rule. In other words, the policy rate tool is more efficient than money base rule, since its control of inflation rate and exchange rate is more efficient and has fewer negative effects on economic growth and private consumption.