The effect of institutional quality on monetary policy in Iran’s economy: A DSGE approach

Abstract

The aim of this study is to investigate the effect of institutional quality on the cyclicality of monetary policies in Iran. For this reason, a Dynamic Stochastic General Equilibrium (DSGE) model is developed for Iran. In this study International Country Risk Guide (ICRG) used as a representative for institutional quality. Considering that this representative is a combined index obtained from twenty-two sub-indices in three groups. It seems that there is sufficient comprehensiveness to provide the country's institutional status. This proxy is improvised in profit function of foreign investors and tax leakage which lead to reduction in government revenue. The results obtained from solving DSGE model shows that an improvement institutional proxy can change the cyclical behavior of monetary policy’s behavior and transforms it from a cycle-independent state to a counter-cyclical state.

Keywords

• Institutional Quality
• Monetary Policy
• DSGE

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