Monetary policy-maker reaction function in the Iranian economy: Smooth Transition Regression (STR) approach

The reaction function of the monetary policy maker can provide insight into the factors influencing monetary policy decisions. Empirical estimates indicate the existence of differences among countries, whether monetary policy only reacts to expected inflation or takes into account expected production developments. This study investigates the reaction function of the Iranin central bank, focusing on the variation in nominal interest rate as the main instrument for monetary policy. For this purpose, we analyzed  the reaction function of the monetary policy authority for the annual time series period from 2002 to 2019 using nonlinear Taylor rule.Evaluating the behavior of monetary policy makers in response to changes in situational variables; Oil price changes, official exchange rate changes, inflation gap and production gap using smooth transition regression (STR) model have shown that, firstly: the reaction function of the monetary policymaker in Iran is non-linear and secondly; It can be seen that by entering the variables of official exchange rate changes and oil price changes into the model, with the increase of the production gap coefficient compared to the inflation coefficient, the inflation targeting scenario changes towards the targeting of production stabilization, and thirdly; The variable influence channel of oil price changes on the reaction function of the monetary policymaker is the official exchange rate gap.