RT - Journal Article
T1 - Optimal Monetary Policy Speed Limits in Iran Economy
JF - JSE
YR - 2013
JO - JSE
VO - 3
IS - 12
UR - http://jemr.khu.ac.ir/article-1-556-en.html
SP - 1
EP - 27
K1 - Optimal Monetary Policy Speed Limits
K1 - Mechanism Commitment
K1 - Instrumental Rule
K1 - Loss of the central bank
K1 - Iran economy
AB - The commitment and forward-looking behavior of central bank is of great importance. Commitment imposes less social costs on the central bank and the public. However, while there is wide agreement on the importance of commitment, there is much less consensus on how to implement commitment through targeting or instrumental rules. In this paper, we have estimated a basic New Keynesian model in Iran economy based on quarterly data over a sample period for 1990-2010. Then, we introduced a kind of instrumental rules that is called Speed Limit rule. The main feature of this rule is that the output gap is replaced by the changes in the output gap in the central bank's loss function. Then, by calculating appropriate weights under alternative targeting rules, we showed that this rule has the lowest social costs. Then, assuming the use of interest rate as primary monetary policy by the central bank, it is optimal to consider the role of the changes in the output gap (i.e. speed limit rule) in addition to the role of inflation and the output gap. As we expected, the estimation results of this instrumental rule in Iran economy showed that this rule has not been used for determining the interest rate. In other words, among the variables considered, only inflation rate has a positive and significant relationship with the interest rate, and the output gap and the changes in the output gap are not used in determining the interest rate.
LA eng
UL http://jemr.khu.ac.ir/article-1-556-en.html
M3
ER -