Nominal Feedback Rules in Iranian Monetary Policy: An Investigation of the McCallum Rule

Consequent to the financial crises, nominal feedback rules received considerable attention consideration from many of the monetary authorities in many countries. The innovation of these rules is a feedback mechanism that allocates precise adjustments to the monetary policy instruments where target variable deviates from its desired path. Mc Callum's rule can be taken as one of the most prominent feedback models in monetary economics. In the present study, the experimental behavior of the policymakers in the Iranian Central Bank will be investigated applying nonlinear Mc Callum's rule in the period of 1368:4 (1990:1) to 1396:4 (2018:1) using Markov-switching model. Considering that the Iranian Central Bank does not announce the precise production and inflation targets, the model estimation will be carried out based on the assumption of unobservable target variable. In this regard, for estimation of the two unobservable variables of nominal production growth and inflation, Bayesian Kalman filter will be employed. Then model will be stimated with markov switching approach in different rejime. The analysis of the model coefficients shows that the central bank during the recession assigned more weight to the nominal output growth variable and in the boom period more weight was assigned to the inflation gap variable. This illustrates the correct response of the central bank of Iran to these variables base of theoretical expectation. Therefore, in this paper and base on estimation results of nonlinear McCallum rule, the asymmetric behavior of the central bank with respect to the monetary reaction function is confirmed.