Despite considerable development in macroeconomic theory in recent decades, the impact and magnitude of monetary and exchange rate policies on real economic variables are in dispute. This paper, by the aid of a co-integrated Macroeconometric Model of the Iranian economy, tries to do an analysis of such issue.
Monetary policy is conducted via two policy instruments which are considered to be at the disposal of monetary authorities, namely required reserve ratio and central bank credit to the commercial banks. Simulation results of monetary policies show a significant effect on the real economic variables. An expansionary monetary policy boosts GDP and employment. Private investment, non-oil exports and private consumption are also increased.
Exchange rate policy is conducted by making an arbitrary change in the official exchange rate. Simulations suggest that the devaluation of Rial against US Dollar causes a fall in GDP. Although imports fall but surprisingly there is no significant improvement on non-oil exports. Money supply also increases. This causes the price
level to rise and thus creates stagflation.
JEL Classification: E5, E6.