Evaluating Taylor Rule and Money Growth Rate Rule in a DSGE Model for Iran

The Effectiveness and efficiency of monetary policy as a challenging problem in economics has been considerably discussed among policymakers. Moreover, it has been shown that applying monetary rules are more successful than using discretion in conducting monetary policy. Currently, Taylor rule is widely used in a large number of countries. This paper analyzes two alternative monetary policy rules, Taylor rule and money growth rate rule, in new Keynesian stochastic dynamic general equilibrium models for Iran economy and also compares the results of them. However, neither of these rules has been applied to Iran monetary policy yet, the parameters of the rules are determined such that the moments of simulations approximately equal to the moments of real economy. Analyzing the moments of simulated parameters and comparing them with the real world’s data demonstrates that presented models in simulations of Iran macroeconomic are properly matched with both theoretical principles and Iran economy. Furthermore, the type of used monetary rules depending on the type of economic shocks, technology, oil or government expenditure, could affect intensity of variables responses to the shocks. Finally, it is shown that the effect of the presented rules on the inflation variable is higher than the real sector variables.