Optimal monetary rule under floating and managed exchange rate

Document Type : Original Article


1 PhD Candidate in Economics, Alzahra University

2 Assistant Professor, Alzahra University


This research is an attempt to study about the optimal monetary rule in floating and managed exchange-rate regimes in a form of Dynamic Stochastic General Equilibrium (DSGE) model, considering oil export economy. It is given that Central Bank's decisions in floating exchange rate regime is based on one optimal monetary rule related to the loss function of central bank to stabilize macro economy in small open economy, but in managed exchange rate regime, the decision making is based on the feedback of two political rules, one of them is for nominal interest rate and the other one is for changing in nominal value of exchange rate, and Central Bank’s decisions is based on the interaction between interest and exchange rates. As a result, the research shows that, if decision making is according to the optimal monetary rule while decreasing inflation has more importance than economic growth, the loss function of central bank is minimized in both regimes. Therefore the proposed model shows that how central bank can make a better political decision (low loss) by administrating goals policies (interest and exchange rate) in floating and managed exchange-rate regimes. The model is solved by using Dynare and Calibration method.


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