Optimization and Analysis of Central bank Losses for Oil Exporting Economy, Application of DSGE Model (Case study of Iranian Economy)

Document Type : Research Article

Authors

1 Faculty of Management, Arak Branch, Islamic Azad University, Arak, Iran

2 Arak Branch, Islamic Azad University, Arak, Iran

3 Qazvin Branch, Islamic Azad University, Arak, Iran

Abstract

One of the most important macroeconomic challenges has always been creating and implementing an economic policy, and it continues to be a key element of planner's decisions. The importance of the time difference between the design process of a policy and the time of its implementation is important in the decision-making process of the economic planner because if the designed policy changes for various reasons during the implementation stage, the policymaker will be forced to revise the original design. This study emphasizes the teachings of New Keynesian economics school by designing a stochastic dynamic general equilibrium model appropriate to the situation in the country, which looks at household, oil, non-oil, import, final producer, and government sectors, after performing linearization process reviews and evaluating the optimal monetary policy, plus considering the central bank's losses. By adopting the optimal discretionary and Ramsey monetary policy approaches, relying on the importance of the weight of inflation, the results show that the understudy variables (non-oil real GDP, GDP, consumption, and inflation) would experience higher volatility in the case of adopting the discretionary policy. Therefore, the Ramsey monetary policy is a better option to control inflation volatility. Nevertheless, the present study findings on the losses by the central bank indicates less loss in the case of adopting optimal Ramsey policy compared to the discretionary policy.

Keywords