Rule-based of Monetary Policy in Iran Inspired by McCallum Rule

Economists have reached a consensus that an independent central bank could improve its policy efficiency by following a monetary policy rule. One of the important rules is McCallum rule where that requires central banks to target the growth rate of nominal GDP using the monetary base as its instrument. One of the features of the McCallum rule uses the monetary base rather than the interest rates as the monetary policy instrument that is consistent with the Interest-free banking system in Iran. This paper utilizes a counterfactual simulation method to evaluate the feasibility of McCallum rule as a policy guideline for Iran in two simple macroeconomic models. The simulation results show that following the McCallum rule could significantly reduce Iran’s nominal GDP fluctuations. The analysis shows that rule-specified path for the monetary base changes could be used as a benchmark for the Central Bank of Iran policy decision.