Evaluation of Monetary and Fiscal Policy Based on New Keynesian Dynamic General Equilibrium Model in Iran’s Economy

Abstract

This paper examines monetary and fiscal policy through the estimation of a New-Keynesian dynamic general equilibrium model for Iran's economy. In this New-Keynesian dynamic general equilibrium model, the consumers encounter the liquidity constraint and the firms face sticky prices, while they are changing them. In the model presented, a role is considered for both government spending and taxation, besides the monetary rule. Then, the model is estimated using Iran's data over the period of 2002-2017, through the method of generalized moments which leads into valuable insight. The results indicate that aggregate demand reacts to changes in interest rates. When inflation occurs, regardless of its source, it is persistent and inertia.The monetary policy has a forward-looking behavior. The output gap with a lag has a negative effect on government spending and the short-term impact of the output gap on government spending is smaller than its impact on taxation (Tax responses to the output gap are stronger and positive).