Assessing the effectiveness of monetary policy on the economy: FAVAR approach

The purpose of this study, is evaluating the effectiveness of monetary policy on the economy. Accordingly, in this study using the Factor Augmented Vector Auto Regressive model and maximization expectations algorithm and 120 economic variables with 1368 to 1392 has been studied to assess the effectiveness of monetary policy in Iran. Considering that interest rates in the banking operations cannot be regarded control tool for the monetary authorities, in this study, using an alternative interest rate. The results indicate that, interest rate shocks have a delayed effect on the money market. So that, in this case one standard deviation hit to interest rates shock, money market has reactions after three months delays to show shock which mainly due to stickiness of contracts related to investment deposits respectively. This Issue, In the labor market and product market reaction is similar.On the other hand, according to the factor agmented vector autoregressive model based on the estimated model with different factor and lags operator, to be appear, according to Bernanke et al (2005) is a trade - off between the number of factors and lags in Iran's economy, so that by increasing the number of operating of factors reduced lags.