Abstract:
The ultimate goal of monetary policy is to achieve price stability and high
output. In this regard, central banks usually change the interest rate, liquidity,
and money base in order to apply monetary policies. The John B. Taylor rule
is one of the rules known in the transmission of monetary policy.1 Based on
this rule and given the output gap and inflation gap, the central bank increases
or decreases the interest rate. Using library references and theoretical foundations,
the current paper employed a descriptive-analytical research method to
explain the hypothesis stating, “Taylor rule can be used to redefine an optimal
monetary rule in the central bank for the mechanism of the stable monetary
policy in the framework of Iranian economy and the Interest-Free Banking Act
(approved in 1983) to enforce monetary policy and control inflation.” According
to the research results and the fact that Taylor rule was successful in some
developed and developing countries, it can be redefined in the framework of
the Interest-Free Banking Act of Iran. It can also be used as a highly flexible
and appropriate monetary rule and a stable model for the mechanism of monetary
policy and inflation control.
Machine summary:
Using library references and theoretical founda- tions, the current paper employed a descriptive-analytical research method toexplain the hypothesis stating, “Taylor rule can be used to redefine an optimal monetary rule in the central bank for the mechanism of the stable monetary policy in the framework of Iranian economy and the Interest-Free Banking Act (approved in 1983) to enforce monetary policy and control inflation.
In other words, monetary policy means a process or set of operations by which monetary authorities of a country (central bank) control and restrain the supply of money often to adjust the interest rate, achieve economic growth, stability, and relative steadiness of prices, and decrease unemployment.
Therefore, it is highly important to design an optimal monetary policy making rule to control inflation and create output stability with respect to the nature of inflation in Iranian economy and the frame of the Interest-Free Banking Act. The reason is that the use of monetary policy reaction functions based on the growth rate of money base and liquidity will be more efficient due to the high power of central bank and the fact that Iranian economy is money-based.
Using the redefinition of Taylor rule in this section, a stable model of mechanism of implementing monetary policy is explained to control inflation with respect to the economic conditions of Iran and the framework of the Interest-Free Banking Act. Considering the enforcement of the Interest-Free Banking Act in Iranian Economy and unlike other countries in which the interest rate is selected as the monetary policy tools.