The Impact of Monetary and Exchange Policies on the Country’s Trade balance Fluctuation with the Approach of Dynamic Stochastic General Equilibrium (DSGE) models

This paper uses the framework of new Keynesian school and the literature of the Dynamic Stochastic General Equilibrium (DSGE) model to build a general model that can be estimated for Iran economy. By simulating this model, the effects of the implementation of monetary and foreign exchange policies through policy instruments including bank interest rate, central bank international reserves and the nominal exchange rate are  evaluated on macroeconomic variables such as real trade balance, production gap, inflation rate, real exchange rate and foreign assets. Monetary and foreign exchange policies are arranged in the form of simple rule policy, and under three foreign exchange policies including managed, floating and pegged exchange rate regimes. The results show that monetary and foreign exchange policies have an effect on the stability of variables related to foreign sectors (real trade balance, real exchange rate, foreign assets and …).  Also in comparison with other alternative regimes, central exchange regime (managed) scenario is in priority and leads to less fluctuations in the model's endogenous variables.