Effects of Fiscal and Monetary Policies on the Iranian Economy: An Optimal Control Approach

Authors

1 Azad University, Khomeini Shahr Branch, Isfahan

2 Islamic Azad University, Khorasgan Branch, Isfahan

Abstract

This paper evaluates the interacted effects of the fiscal and monetary policies on the nominal and real macro-variables of the Iranian economy. Our analysis is thus based on the optimal control theory by which the optimal path of the control variables including monetary and fiscal tools are determined over the period 1963-2006. We also use a macro-econometric model in form of a simultaneous equation system to investigate interaction between both real and money (nominal) sectors. Due to the importance of the foreign sector in the country economic development, several scenarios have been conducted particularly on imports. The empirical results indicate that a focus simultaneously on both monetary and fiscal policies should cause an optimal control of the objective variables to reach approximately their appropriate values. This would be happened as a result of a productive relationship between the government and the central bank.  JEL Classification: C32, C61, E52, E63.

Keywords