Analysis of monetary policies in the condition of disequilibrium in Iran's economy - DSDE- dynamic stochastic disequilibrium model approach

Extended Abstract
Purpose: Monetary policy rules that are used to implement monetary policies by central banks are determined in a strategic framework in order to do trade-offs between goals such as inflation, unemployment and economic growth. Economic authorities use laws as a guide to implement their policies regarding the deviation of target variables from their desired goals or levels.
The new Keynesian DSGE models in vogue in central banking have long ignored the insights of the economy information revolution to which Joseph Stiglitz made an important contribution. Furthermore, these models have not been successful in providing important research insights about alternative theories on model selection and the consequences of structural failures in the econometric literature, in which David Hendry plays a key role. By addressing the debates between the critics and advocates of New Keynesian DSGE models, Henry and Muelbauer show how evidence-based research can improve quantitative policy models and enable central banks to better understand financial stability and models.
The fundamental difference between the neoclassical and Keynesian theories lies in the understanding of the labor market. In the neoclassical case, the nominal wage is understood as an adaptive variable. In the absence of labor market imperfections such as search and matching frictions or non-equilibrium wages due to the existence of asymmetric information, nominal wage adjustment settles the labor market for a given price level. In such a situation, Keynesian unemployment caused by the lack of aggregate demand cannot exist. The economy is supply-side determined because the factor of market settlement along with the aggregate production function requires a unique level of output and employment.
Macroeconomic modeling has come under severe criticism since the Great Financial Crisis, when serious flaws in the methodology used to understand the economy as a whole became apparent. Criticisms have been directed toward the assumptions used in dominant models, especially in that economic factors are homogeneous and optimal and that the economy is in equilibrium. Some researchers seek to explore an interdisciplinary approach to macroeconomic modeling, with techniques drawn from other sciences (natural and social). In particular, they discuss agent-based modeling as an example of such a technique, which is used in a wide variety of disciplines. Agent-based models complement the existing approaches and are suitable for answering macroeconomic questions in which complexity, heterogeneity of economic agents and their expectations, networks, and discoveries play an important role. Based on the literature, this study uses a disequilibrium approach to investigate the effect of monetary policies on macroeconomic variables.
Methodology: The purpose of this paper was to analyze the monetary policies under disequilibrium in Iran's economy. In order to analyze the results, the random dynamic disequilibrium method was used in the period of 1989-2022 based on the frequency of seasonal data. The approach used in this study is modeling in terms of the disequilibrium in economic markets and its spread to other markets as well as the reaction of macroeconomic variables to the shock. Disequilibrium in dynamic stochastic models occurs due to financial and real frictions in markets. The tools used in this study were the Hamilton-Jacobi-Belman method as well as Kolomogrof's forward-looking expectations in order to solve the model in disequilibrium conditions.
Findings and Discussion: The results obtained from this study indicated that the currency deviation variable has increased in response to the monetary policy shock. Also, with the change in the same variable, this disequilibrium and deviation in the exchange rate has increased over time. It was observed that the shock of the monetary policy has led to the deviation in the exchange rate by creating disequilibrium in the prices. The response of consumer spending to monetary policy shocks has also been increasing over time. The results indicate that, with the introduction of the monetary policy shock, the situation and imbalance in the money and currency market has led to price pressure and an increase in household consumption expenditures, and this trend has been upward over time. The production deviation variable has also increased in response to the monetary policy shock.
Conclusion and Policy Implications: Guiding monetary policies and designing a structure that increases the credibility and acceptability of both applied policies and monetary policymakers, on the one hand, and the realization of the main priority of monetary policies, i.e. achieving a low and stable inflation rate and making it possible to maintain it, on the other hand, in recent years have been the focus of attention of many economists. The results indicate that, with the introduction of the monetary policy shock, the disequilibrium in the money and currency market has led to price pressure and an increase in household consumption expenditures. This trend has been upward over time. The production deviation variable has also increased in response to the monetary policy shock. According to the results obtained from this study, it is suggested that the instability and disequilibrium in Iran's economy are due to the exchange rate and balance of payments, and this imbalance is transferred to all markets through economic policies. This is the basis for the country's monetary authorities to implement their policies, especially in the field of foreign exchange, by setting a fluctuation range and anchoring the nominal exchange rate to changes in foreign exchange reserves as well as the inflation rate to prevent the spread of disequilibrium in the currency and money market as the real sector of the economy.