New Keynesian macroeconomics justifies the effectiveness of monetary policy by different theoretical arguments such as existence of long - term contracts, efficiency wages, co - ordination failure, unemployment hysrerises, small menu costs and etc. An additional theoretical model, which has recently been developed, is the output-lags model, which creates a kind of price dynamics in economies, which in turn cause monetary policy to be effective. The purpose of this paper is to show that because of lags between inputs and outputs in the Iranian economy, monetary policy can affect real output and employment and hence cause real business cycles. Using this theoretical framework and macroeconomic data, the paper tests the effectiveness of monetary policy during the period 1959-2000 and show that there exists a one - year lag in output which has led to a kind of rigidity in the Iranian economy. As a result of this, output and employment can be affected by monetary policy.