Monetary Policy Role in Transmission of the Effects of Oil Shocks on Iran's Economy

This paper analyzes monetary policy role in transmission of oil shocks on Iran’s economy as an oil exporting country. To achieve this, we develop a New Keynesian dynamic stochastic general equilibrium (DSGE) model. Within this framework, oil sector and oil export revenues have been modeled as a separate sector and one of the government budget resources, respectively. Also, oil shocks affect the economy both separately and through their effects on money growth rate. Like all other New Keynesian models, nominal rigidities and monopolistic competition have been introduced in the model. Optimizing, solving and calibration of the model show that business cycle moments generated by the model and those of actual statistics from the Iran’s economy match closely. In the next step, we suggest two ways to examine the effects of monetary policy on transmission of oil shocks on the economy. These approaches are; 1. Examination of the complete transmission of oil shocks on money growth rate, 2.Examining the effect of the zero transmission of oil shocks on money growth rate. With calibrating the model, considering these two assumptions, we find that monetary policy channel has very important effect on transmission of oil shocks on the economy and blocking this channel would reduce the fluctuations arising from oil shocks considerably.