Inflation Targeting: Optimal Control Approach

Many countries like Iran are looking to solve the serious problems caused by inflation. In this research, the authors are to present a way for controlling the inflation during 5th development plan during 2008-2016 in Iran by using Optimal Control theory and Time Series data of Central Bank during 1998-2007. The interest rate reaction function will be derived and the central bank loss function subject minimized to exchange rate deviation, inflation as well as production behavior. The results indicate that the monetary authorities should increase the interest rate to reduce the liquidity as the cost of financing investments in the production sector. It leads to the control of the inflation directing to the value targeted.