Optimal Monetary Policy with Heterogeneous Agents in Iran (1989-2017): A Model Based on Time Consistency Problem

Abstract

Policy rules as one of the most acceptable methods in monetary policies are among the significant characteristics of researches about policymaking. A policy rule states how the policy tools should react to changes in economic situations. Understanding the tools and criteria of monetary policies such as changes in target inflation, changes in relative weights of prices stability and employment, and its effect on different sections of society including households and economic firms can help economic policymakers to increase the effectiveness of monetary policies. This paper studies the time consistency and structure of optimal monetary policy from the viewpoint of public sector finance concerning the heterogeneous behavior of economic agents in form of keeping liquidity and nominal assets in Iran. The study utilizes time-series data quarterly from Q1 1989 to Q4 2017. A new Keynesian dynamic stochastic general equilibrium (DSGE) models have been developed for monetary policy analysis in open economies. Results show that the redistribution effect of monetary policy leads to breakage of the link between time consistency and high inflation; a characteristic that belongs to optimal monetary and fiscal policies.