Macroeconomic Performance in Different Exchange Rate Regimes: An Estimated DSGE Approach

Abstract

Selection of exchange rate regime and its consequences, is one of the major issues in international finance. Dependence of Iran to oil export revenues gives an important role to exchange rate policy in the economy. Using a dynamic stochastic general equilibrium open economy model for Iran, macroeconomic performance of the economy in three exchange rate regimes of floating, managed floating and fixed exchange rate regimes are compared. The model includes households, firms, government, monetary authority and foreign trade sector and the model also consists of Calvo price rigidity in production sector. The model is estimated by optimization of activities in different sectors, linearization of resultant equations and Bayesian estimation of parameters using macroeconomic data of Iran. The results show that inflation fluctuations response to oil and technology shocks are more volatile than other shocks. In the fixed exchange rate regime inflation variation is the lowest and output variation is the highest.

Keywords

• fixed exchange rate regime
• managed floating exchange rate regime
• floating exchange rate regime
• dynamic stochastic general equilibrium