Optimal Monetary Policy with Heterogeneous Agents: A Model Based on Time Consistency Problem

Authors

1 Department of Economics, Qazvin Branch, Islamic Azad University, Qazvin,Iran.

2 Department of Economics, Abarkouh Branch, Islamic Azad University, AbarKouh , Iran.

3 Department of Economics, Qazvin Branch, Islamic Azad University, Qazvin, Iran.

Abstract

Policy rules as one of the most acceptable methods in monetary policies is among the significant characteristics of researches about policy making. A policy rule states how the policy tools should react to changes in the economic situations. Understanding the tools and criteria of monetary policies such as changes in target inflation, changes in relative weights of prices stability and employment, and its effect on different sections of society including households and economic firms can help economic policy makers to increase the effectiveness of monetary policies. This paper studies the time consistency and structure of optimal monetary policy from the viewpoint of public sector finance with respect to heterogeneous behavior of economic agents in form of keeping liquidity and nominal assets in Iran. The study utilizes time series data on a quarterly basis from Q1 1989 to Q4 2017. A new Keynesian dynamic stochastic general equilibrium (DSGE) models have been developed for monetary policy analysis in open economies. Results shows that the redistribution effect of monetary policy leads to breakage of the link between time consistency and high inflation; a characteristic that belongs to optimal monetary and fiscal policies.
 

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