Abstract:
T he world economy has experienced a bulk of positive and negative shocks in crude oil prices and exchange rates over the years, and that global inflation has undergone some changes. Such shocks have affected the macroeconomic variables in the countries of the world and have challenged the economies of these countries, and have led them to take different measures to protect themselves against the devastative effects of these shocks. Accordingly, the main objective of the current study was to analyze the dynamic effects of three external shocks (global oil price shock, euro / dollar exchange rate shock and global inflation shock) as well as to investigate the appropriate monetary policy strategy for the Iranian economy, given the structural characteristics and patterns of external shocks. In so doing, we analyzed the responses of external responses to external shocks according to alternative monetary rules, including Headline Inflation Targeting (IT), Core Inflation Targeting (CIT), and Exchange Rate (ER) rule. Therefore, in this research, the goal was to determine the monetary policy rule to minimize both macroeconomic fluctuations and keep inflation at a low level. Furthermore, we strived to answer the question that whether the inflation criterion in Iran should be headline inflation, core inflation or exchange rate. To answer this question, using the DYNARE software, we estimated a multiplicative New Keynesian Dynamic Stochastic General Equilibrium model based on the characteristics of Iranian economy. Our primary finding showed that core inflation rule was the best monetary rule for stabilizing both macroeconomics and inflation.
Machine summary:
In this paper, we focused our attention on Iran as a small open economy, which exports oil and estimated a Dynamic Stochastic General Equilibrium (DSGE) model with a new Keynesian approach for Iran's economy through which we investigated the dynamic effects of three external shocks (oil prices, exchange rates, and foreign inflation) and tested the appropriate monetary policy rule.
(2006), Madina and Soto (2005), and Leduc and Sill (2004) developed DSGE models to study macroeconomic concepts of alternative monetary policy rules after external shocks for a small open economy.
The cost and income presented above will result in the household budget being as follows: d Pt ct it e B f f Bt et t Bt Q j t k j t 1 W j t h j t Dt ,t t t t d Rt Rt kt f 1 , , j o,no , , j o,nofor j= o,no (6) where Pt it = P0,t i0,t + Pno,t ino,t is the total investment in oil and non-oil sectors, respectively, and Pt is the consumption price index CPI) defined as follows: According to the initial value, the factor of theinternal inhabitants {ct , k0,t+1, kn0,t+1 Bd and Bf } to maximize thelifetime utility function, according to the capital accumulation equation, chooses the budget constraints and limits without playing Ponzi.
The Effect of External Shocks under Alternative Monetary Policy Rules Forms B-1 to B-3 show our domestic macroeconomic responses to three shocks: oil prices, euro/dollar exchange rates and foreign inflation.
GDP Investment Core inflation Consumption Headline inflation Real exchange rate Figure 4: The Effect of Global Oil Price Shock on Macro Variables in the form of Alternative Monetary Policy 6.
More precisely, real variables such as gross domestic product, consumption, investment, have more short-term response at the base of the exchange rate than core inflation targeting and headline inflation targeting.
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