Investigating the performance of currency regimes in production and inflation fluctuations under international financial integration conditions for Iran: using a DSGE Model

International financial integration is a process of reducing financial frictions that lead to formation of free capital flows. Joining the international financial flow influences the volatility of economic variables from different channels and hence, it is important to examine the conditions that key variables are less responsive to shocks despite the capital account transfers. One of the issues that is being considered in this regard is the choice of the currency regime. Hence, in this paper, in assistance with a general dynamic stochastic equilibrium model with price rigidity, at first, a channel was designed to simulate the financial integration scenario in line with the characteristics of the Iranian economy and then the model performance in two modes of floating and managed float exchange rate regime in response to government spending and oil shocks has been investigated. The results show that, in response to government spending shocks, the floating exchange rate will lead to less fluctuations in key variables such as production, consumption, inflation and real exchange rate and in response to the oil shocks, managed float exchange rate will lead to less fluctuations in production, consumption, inflation and real exchange rate.