Optimal Monetary Policy for the Iranian Economy: an Application of Optimal Control theory

In this paper we have utilized optimum control procedures to derive an optimum monetary rule for Iran’s economy; assuming the policy makers are using the interest rate as a policy variable. In doing so a dynamic stochastic model with rational expectation was setup. The model is calibrated with the use of previous findings in the literature. The results show that the optimum reacrion of the policy makers should be to raise the interest rate in the event of increase in inflation and output and to lower in response to technological shock. The policy makers should also aggressively increase interest rate to an increase in money supply. The interesting point is that the optimum policy requires reaction of the interest rate to the asset prices under different senarious.