Linear and Non-Linear Estimates of Monetary Policy Reaction Functions in Iran

Determining how monetary policy makers react to changes in key economic variables has been of major interest to monetary economists. Estimates of monetary policy rules (reaction functions) are widely used method for doing this. Behavior differs under different policy regimes, as in rule-based systems or chronic inflation. In practice,estimates of instrument rules have been used to describe how the central bank alters its policy in response to expected macroeconomic events. In this paper we providelinear and non-linear estimates for various instrument rules for Iran. Linear estimates show that monetary policy in Iran tends to accommodate rather than counteractinflationary pressures. The estimates also show that Central Bank of I. R. Iran does not systematically follow any of the well-known instrument rules or hybrid types. Thenarrative that can be read from non-linear rule estimates is that, in the low inflation states expansionary policies by CBI tend to support economic activity. However,during high inflation periods, CBI does not exercise anti-inflation policy but such stance cannot accommodate output growth. Monetary policy seems to be ineffective ifnot inappropriate in this state.

Keywords:

Monetary Policy , Instrumental Rule , Non-Linearity , Threshold Effect , McCallum Rule , Monetary Policy Reaction Function