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

Document Type : Research Article


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

2 Qazvin Branch, Islamic Azad University, Qazvin, Iran


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.


Taylor, J. B. (2007). Housing and monetary policy (No. w13682). National Bureau of Economic Research.
Eltejaei, E., and Arbab Afzali, M. A. A. (2014). Asymmetric Effects of Oil Price Shocks on Iran’s Major Economic Variables. Comparative Economics, 1(1), 1-26.
Mehregan, N., Abbasian, E., Isazadeh, S., and Faraji, E. (2017). Examination of Real Shocks and Production Fluctuations of Iran’s Economy. Quarterly Journal of Economic Growth and Development Research, 8(29), 17-30.
Zare Shahneh, M. M., Nasrollahi, Z., and Parsa, H. (2020). The impact of gender inequality on macroeconomic variables in the framework of a DSGE model. Quarterly Journal of Applied Theories of Economics, 7(1), 29-60.
Tavakolian H., and Jalali Naeini A. (2016). Discretionary and optimal monetary and exchange rate policy in a stochastic dynamic general equilibrium model estimated for the Iranian economy. Iranian Economic Research Quarterly, 70, 33-98.
Aizenman, J., Hutchison, M., and Noy, I. (2011). Inflation targeting and real exchange rates in emerging markets. World Development, 39(5), 712-724.
Filis, G., Degiannakis, S., and Floros, C. (2011). Dynamic correlation between stock market and oil prices: The case of oil-importing and oil-exporting countries. International review of financial analysis, 20(3), 152-164.
Miao, J., Wang, P., and Xu, Z. (2015). A Bayesian dynamic stochastic general equilibrium model of stock market bubbles and business cycles. Quantitative Economics, 6, 559-635.
Kim, S. T., and Rescigno, L. (2017). Monetary policy shocks and distressed firms’ stock returns: Evidence from the publicly traded US firms. Economics Letters, 160, 91-94.
VukotiĊ›c, M. (2007). Exchange Rate Dynamics in an Estimated Small Open Economy DSGE Model.
Chung, T. F., and Ariff, M. (2016). A test of the linkage among money supply, liquidity and share prices in Asia. Japan and the World Economy, 39, 48-61.
Tavakolian, H. (2012). A new Keynesian Phillips curve in a DSGE model for Iran. Journal of Economic Research (Tahghighat-E-Eghtesadi), 47(3), 1-22 [In Persian].
Jalali-Naini, A.R. and M.A. Naderian (2011). Inflation and Output in a Cash-Constraint Economy. Journal of Money and Economy, 6, 1-28.
Aastveit, K. A. (2014). Oil price shock in a data-rich environment, Energy Economics, 45, 268-279.
Bodenstein, M., Guerrieri, L., and Kilian, L. (2012). Monetary policy responses to oil price fluctuation. IMF Economic Review, 60, 470-504.
Calvo, G. (1983). Staggered prices in a utility-maximizing framework, Journal of Monetary Economics, 12, 383-398.
Castelnuovo, E., and Nisticò, S. (2010). Stock market conditions and monetary policy in a DSGE model for the US. J. Econ. Dyn. Control. 34 (9), 1700–1731.
Miao, J., Wang, P., and Xu, Z. (2013). A Bayesian DSGE Model of Stock Market Bubbles and Business Cycles. Available at: www.aeaweb.org.
Friedman, M. (1959). A Program for Monetary Stability, New York: Fordham University Press.
Kydland, F., and Prescott. E. (1977). Rules Rather Than Discretion: The Inconsistency of Optimal Plans. Journal of Political Economy, 85, 473-490.
Carlson, J. B. (1988). Rules versus discretion: making a monetary rule operational. Economic Review-Federal Reserve Bank of Cleveland, 24(3), 2.
Khalili Iraqi, M., Shakouri, H., and Zangeneh, M. (2009).Determining the optimal rule of monetary policy in Iranian economy using the theory of optimal control: Journal of Economic Research, Vol. 88, pp. 69-94.
Woodford, M. (2003). Optimal interest-rate smoothing. the review of Economic Studies,70, 886-861
Volkart D. (2007). Rules, Discretion or Reputation? Monetary Policy and the Efficiency of Financial Markets in Germany. 14th to 16th Centuries, SBS 649, Discussion Papers, N. 007.
Dargahi, H., Sharbat Oghli, K. (2010). The optimal rule of monetary policy in the inflationary conditions of the Iranian economy using the theory of optimal control. Journal of Economic Research, 88.
Jazdani, H. (2019). Investigating the reaction of macroeconomic variables to taxes in the Iranian economy in the framework of a DSGE model. Journal of Development & capital, 2, 85-104.
Salah Manesh, A., and Pour Javan, A. (2017). Design & Calibration of new Keynesian DSGE model with stock market dynamics in Iranian economy. Journal of Financial Knowledge of Securities Analysis, 38, 57-75.
Zahabi, M., Barazan, F., and Afshari, Z. (2017). Calculate the optimal monetary policy rule by examining the current account and exchange rate fluctuations (Bayesian approach). journal of Economic Research and Policies, 83, 145-181.
Zanous, P., Bahrami, J., Tavakolian, H., and Mohammadi, T. (2018). The role of international financial integration on production fluctuations and inflation in Iranian economy (DSGE approach). Journal of economic modeling research, 39, 7-44.
Antosiewicz M., Lewandowski, P., and Witajewski, J.B. (2016). Input vs. output taxation - A DSGE approach to modelling resource decoupling. Sustainability, 8(4), 1-17.
Barro, R.J. and Gordon, D. B. (1983). Rules, discretion and reputation in a model of monetary policy: journal of monetary economics ,12,121-101.
Svensson, L.E. (1997). Inflation forecast targeting: Implementing and monitoring inflation targets. European economic review, 41, 1111-1146.
Medina, J. and C. Soto (2005). Oil Shocks and Monetary Policy in an Estimated DSGE Model for a Small Open Economy. Central Bank of Chile, Working Paper No. 353
Allegret, J.p. and M.T. Benkhodja (2011). External Shocks and Monetary Policy in a Small Open Oil Exporting Economy. Economix Working Paper, 20, 11-39.
Yun, T. (1996). Nominal Price Rigidity, Money supply Endogvaeity and the thwsiness Cycles. Journal of Monetary Economics, 37, 345-370.