Optimal monetary policy in usury free banking system, The Case of Iran

The banking system in Iran operates based on the monetary and banking act and the law for usury-free banking operations; however, in most Islamic countries, there is a dual system of Islamic banking and conventional banking. In this study, the monetary policy in Iran is investigated by Taylor rule firstly then the optimal monetary policy (Ramsey method) with maximizing household utility as a target of the central bank is considered by using the nonlinear new Keynesian DSGE model. Necessary changes in various sectors of the model, including households, production sector, government, oil sector, central bank, state-owned banks, non-governmental banks and stock exchanges as financial intermediaries, for a small oil-exporting economy within the framework of usury free banking system is considered and its results are evaluated and described. The results show that in the case of deterministic steady state (Taylor rule), monetary shock has greater impact on gross domestic product, and if Ramsey’s optimal monetary policy is pursued, the effects of shocks, will decreased and economic stability will be improved.