Optimal Monetary Policy Rules in Iran : A Welfare Analysis

Following a monetary growth rate rule, the present paper ranks four simple monetary rules under various stochastic shocks. The criteria to choose among rules are obtained using a welfare criterion derived from the utility function of the representative agent. The main results are: the effects of alternative monetary rules depend on what shocks affect the economy, exchange rate regime and the inflation index being targeted; with regard to the monetary rules, managed exchange rate rule dominates the other rules under demand or supply shocks, whereas domestic inflation targeting is the best performer under real shocks. As far as the definition of inflation targeting index is concerned, CPI inflation targeting appears to outperform the domestic inflation targeting under demand or supply shocks