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DYNAMIC STOCHASTIC GENERAL EQUILIBRIUM (DSGE) AND NEWS SHOCK: A REVIEW OF REGIONAL MONETARY AFFECTIONS IN IRAN

Author(s)

Hossein Marzban, Alihossein Samadi, Ahmad Sadraei Javaheri, Shapoor Zarei*

Author affiliation

Faculty of Economics, University of Shiraz, Tehran 14159, Iran

Abstract

This study aims to investigate the effects of news shockshmonetary policies in Iran using the Dynamic Stochastic General Equilibrium (DSGE) model. To this end, two kinds of news shocks (known as technology and consumer preferences) were defined according to Khan and Tsoukalas’ approach. In order to construct and simulate the DSGE model to approaching the real conditions in Iran, consumption habits in the utility function were concerned based on the assumption of the zero-value obtained from multiplying the inflation by the real interest rate in the Fisher’s equation, whereas the real interest rates in the long run were appointed as negative remark in simulating the monetary policy models. The estimation and simulation results for the research models indicated that monetary policies using the interest rate instrument identified the news shocks less frequently than monetary policies using the monetary base instrument. In regard to findings and results mentioned in this case-study research, the approximate value of the social loss function in the optimal commitment and discretionary monetary policies suggests that the optimal commitment policy is estimated to be lower in both cases. Due to value of the social loss function in optimal monetary policies with nominal interest rate instrument in the presence of news shocks, this could be claimed that monetary policy with interest rate instrument is more appropriate than the monetary policy with a monetary base instrument.

Keywords

News shock, Monetary policy, DSGE model, Social loss function, Impulse responses function.