The Consequences of Ignoring the Non-Ricardian Households in the Ramsey Optimal Monetary Policy and Macroeconomic Variables (In the Form of DSGE Model)

The purpose of this study is to investigate the impact of adding a non-Ricardian household to a DSGE model in choosing the Ramsey optimal monetary policy and consequently the effects on macroeconomic variables (such as output gap, consumption gap, inflation, and rising nominal exchange rate). Therefore, after estimating a model for the Iranian economy, the Ramsey optimal monetary policy was selected from 6 monetary policy alternatives. Then, in two scenarios, a non-Ricardian household is added to the model. In the first scenario, the non-Ricardian household consists of 20% of households and in the second, it consists of 40% of households. Then, Ramsey optimal monetary policy was selected for these two scenarios. The results show that the when the percentage of non-Ricardian households in the model increases, monetary policy-maker deviates from targeting monetary variables and gives more importance to production targeting. Second, if Ramsey optimal monetary policy is chosen without considering the non-Ricardian household in the model, in facing the shock of falling oil prices, the shock of declining money demand and the shock of rising external inflation, the responses of the production and consumption sectors in scenarios 1 and 2 are significantly different from the baseline model. But the consumption and production sectors have almost the same reactions in three models in response to the shock of the rising nominal exchange rate.