The Effect of Monetary Policy on Business Cycles in Iran Economy

Nowadays one of the most important issues in our economy, both from economic and political view is the link between monetary policy and the business cycle fluctuations. Amongst the shocks related to supply side, the shock of oil price is the important factor that has affected the world economy since 1970s. This paper examines the effects of monetary policy and oil price shocks on the business cycle fluctuations by applying the factor augmented vector autoregressive approach, Bernanke (2005) … to compare the results with VAR models by using Iran quarterly data for the period 1988:Q2 to 2011:Q3, the FAVAR models explain the effects of monetary policy which are consistent with theory better than VAR models. The results demonstrate a small but significant impact of monetary policy on business cycle fluctuations.