Optimality of Monetary and Fiscal Policies in Iran: An Application of the Stochastic Optimal Control Theory

This paper analyzes the optimality of macroeconomic policies in Iran during the third five year development plan (2000-2004). For this purpose, we develop and use a macro econometric model for Iran. We determine optimal monetary and fiscal policies as solutions of optimum control problems with a quadratic objective function and a macro econometric model as a constraint. The results show that, the optimal values of macroeconomic policies have deviation from those proposed in third development plan. So that, deviations in the variables of government current expenditures, government tax revenues and government oil revenues are low and in variables of government capital expenditures and money stock as monetary policy are high.