The Monetary Policy Transmission Mechanism in the Framework of the Term Structure of Interest Rate in Iran’s Economy

This paper study the effectiveness of the monetary policy with respect to the time structure of interest rates, which could play a role in the monetary policy transmission mechanism, on economic variables including production, inflation, money and bond yields. To do this, we used the Dynamic Stochastic General Equilibrium model of bond yields Zagaglia (2009), where long-term interest rates are an integral part of the monetary transmission mechanism. The model is estimated with the Bayesian method on Iran’s data for the period of 1991-2 to 2017-1. To evaluate the accuracy of this model, simulated data moments were compared with real data moments. Analyzing the Variance Decomposition shows that changes in the product are explained by technology shock, bond supply shock, and monetary policy shock. Analyzing the Impulse Responses of the model shows that the monetary policy shock, as well as changes in the money demand and bonds supply, could explain the movements in long-term interest rates.