Modeling the foreign exchange market pressure in the monetary policy of the Iranian economy with a Dynamic Stochastic General Equilibrium approach

Exchange rate fluctuations and the degree of central bank intervention in the foreign exchange market through foreign reserves simultaneously determine the foreign exchange market pressure. This concept is considered as one of the important indicators related to the behavior of monetary authorities in policy-making, which affects other economic variables through foreign trade channels and inflation expectations. In this paper, foreign exchange market pressure is analyzed at the monetary policy function based on Dynamic Stochastic General Equilibrium model for Iran. the behavior of policymakers is modeled against exchange rate shock and foreign earnings from oil exports shock. Exchange rate shocks are compared in two models. n the first model, the central bank adjusts its monetary policy in response to the foreign exchange market pressure index, and in the second model,the central bankchr(chr('39')39chr('39'))s monetary policy response to nominal exchange rate, based on other empirical studies of Iranchr(chr('39')39chr('39'))s  monetary policy. Based on the results of the first model, the exchange rate shock causes less fluctuations in inflation, production, consumption and investment rather than the second model, and the effects of exchange rate shock are discharged on the economic variables in a shorter period of time. Therefore, the effectiveness of the central bankchr(chr('39')39chr('39'))s monetary policy through sensitivity to foreign exchange market pressure will be higher than the nominal exchange rate.