The Performance Evaluation of Central Bank of Iran in Committing to Monetary Rules

Over recent years, the fundamental macroeconomic questions have been noticed by economists are whether monetary policy must be conducted based on policy rules. If yes, which rules should be followed? Moreover, another question is whether the policymaker prefers to commit to the announced rules or decide according to a discretionary approach. In the literature, this issue has been known as time inconsistency problem which is introduced by Kydland and Prescott (1977). In this study, through answering two questions, we examine the degree of commitment of the central bank, as a monetary authority, during the period of 1360 – 1393. First, is there any legal reliance for the directives issued by the central bank? Second, is there any coordination between the directives and the fundamental laws such as the monetary and banking law, Usury-free Banking law, and the development plans? So, directives issued by the central bank are checked and analyzed to find answers to these questions. The positive answers mean the central bank is committed to the rules. The results show that, despite some violations, we cannot statistically confirm the null hypothesis that the central bank follows a discretionary policy.