Welfare Analysis of Monetary policy in Iran''''s Economy

Document Type : RESEARCH PAPER

Author

معاونت اقتصادی مرکز پٰژوهش مجلس

Abstract

The historical relationship between inflation and liquidity has in the past been in the same direction, but now this relationship has been weakened. However, the significant effect of liquidity growth on the rate of price growth cannot be ignored. In order to maintain total welfare in the form of minimizing the welfare loss function, monetary authority aims to control inflation using monetary instruments, in particular to prevent the growth of the monetary base. The present paper also calculates the welfare outcome of inflation using a dynamic stochastic general equilibrium (DSGE) approach and using a new Keynesian approach and highlighting the role of household consumption in optimal monetary policy. Also, the effects and consequences, reaction functions, losses due to increased inflation and deviation from the optimal inflation rate are examined. The results show that inflation reduces welfare even at low levels. In particular, in the presence of 10% inflation, the welfare cost of inflation was calculated at 5.5%. The policy proposal emphasizes targeting inflation as a monetary policy framework. Although this is not a guarantee of achieving optimal welfare, it can be a key and effective factor

Keywords

References

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