Quantitative Determination of Optimal Fiscal and Monetary Policies: A Stochastic Optimal Control Analysis for Iran

This paper analyzes the design of macroeconomic policies for Iran during the fourth development plan (2005-2009). For this purpose, first we develop and design a macroeconometric model for Iran economy. Then, we use the stochastic optimal control algorithm “OPTCON” until determine optimal fiscal and monetary policies as solutions of optimum control problems with a quadratic objective function and the macroeconometric model as a constraint. The results show that, the optimal values of government current expenditures, government capital expenditures, tax revenues and oil revenues as the set of fiscal policies, are greater than those proposed in fourth development plan where as money stock as monetary policy is less than the proposed one. The comparison between the effects of the proposed and optimal macroeconomic policies on goal variables, show that using the optimal policies, will improve the economic growth rate significantly and led to lower inflation and unemployment rate. Also, these optimal policies decrease the ratio of budget deficit to GDP some deal. Therefore, the determination of optimal macroeconomic policies for fifth development plan and remainder of the Iran’s twenty years of development prospect bill is suggested.