Financial Cycles and Monetary Policy in Iran's Economy

The global financial crisis in 2007 showed that financial variables from different channels could exacerbate business cycle fluctuations. From the perspective of modeling in the economy, the models that assumed financial markets without friction lost their credibility. Accordingly, the correct response of the monetary authorities to the financial cycles has become one of the theoretical and political concerns. Therefore, the present study examines the effects of the central bankchr('39')s reaction to financial cycles during the period of 1369:1 to 1395:4 implementing several counterfactual simulations within the framework of the New Keynesian model. The results in different scenarios indicated that the more sensitive the central bank is to the financial cycle, the output will have less affects by financial shocks. However, inflation will respond to the shock of the financial sector with more fluctuations; therefore, it seems that monetary policy in Iran cannot reduce the effects of financial shock on macroeconomics solely through a change in the monetary base.