Designing Optimum Monetary and Fiscal Policies of Iran Under Uncertainty in Micro-Founded Macroeconomic Model

اقتصاد پولی مالی

Article 1, Volume 19, Issue 3, January 2013   

Document Type: پژوهشی

DOI: 10.22067/pm.v19i3.28548

Authors

Mansor Zarra Nezhad^* ; Ebrahim Anvari

Abstract

In recent decades adopting unreasonable monetary and fiscal policies and
uncertainty in model-making and analysis of data, has become unsatisfactory in
macro goals. In a new Keynesian dynamic stochastic general equilibrium (DSGE)
model to study Iran economy, uncertainty is modeled as uncertainty about the true
structural parameters that characterize the economy. In particular, the policymaker
does not know the true numerical values nor the statistical distribution of the fiscal
and monetary policy. The model considers the dependence of Iran economy to oil
export. Oil sector and oil export revenues have been modeled as a separate sector
and one of the government budget resources, respectively. Like in other New
Keynesian DSGE model, firms face nominal rigidities and the intermediate-good
sector is monopolistically competitive. Impulse response function of shocks show
that non-oil output increases in response to productivity, oil revenues, money growth
rate and government expenditure shocks. The finding shown that a policymaker that
follows a control approach under uncertainty sets interest rates less aggressively to
react against fluctuations in inflation or the output gap than in the case of absence of
uncertainty. Model uncertainty has the potential to change importantly how
monetary and fiscal policy should be conducted, making it an issue that can not be
ignore. In main result, policy performance can be improved if the discretionary
policymaker implements an optimum policy in the model. In effect, a fear of modeluncertainty can act similarly to a commitment mechanism. When there is uncertainty
about the persistence of inflation, it is optimal for policy makers to respond more
aggressively to shocks than if the parameter were known with certainty, since the
avoid bad outcomes in the future.

Keywords

Uncertainty; parameter uncertainty; monetary and fiscal policies; DSGE model; optimum control; Welfare Cost function