The Response of Monetary and Fiscal Policies to the Output Gap in Iran with the Taylor Rule Approach: The Quantile Method

Abstract

One of the most important issues in monetary and fiscal policy analysis is their efficiency or effectiveness, which tells policymakers about effectiveness of policies. In general, the effectiveness or effectiveness of monetary and fiscal policies refers to the extent to which they affect equilibrium national output or income. Therefore, in order to achieve its goals, the policymaker should be able to respond appropriately to the production gap and inflation accordingly, a policy rule covering the goals of the central bank should be used. In this study, in the framework of Taylor rule, the response of monetary and fiscal policies to the output gap has been investigated in the Iranian economy using the Quantile regression method over the period 1976-2018. The results show that by increasing the output gap in different quantities, monetary authorities do not show any reaction to the output gap. But government policymakers pursue an expansionary policy toward the output gap, which is contrary to Taylor's rule, and the results confirm that government policymakers make policy at their will.

Keywords

• taylor rule
• central bank response
• government response
• quantile regression
• output gap