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Fluctuations in fiscal policy affect monetary policy and the central bank, because the government’s general budget is highly dependent on oil prices and its fluctuations. Therefore, this paper designs a New Keynesian model for Iran with nominal rigidities (prices and wages) and analyzes the impact of technology, oil price, government spending and money supply shocks on macroeconomic variables (inflation, output) in economy of Iran. The data in this article are related to the fixed prices in the year 2004 and run annually from 1966 to 2008 on a per capita basis. Having logarithms taken, the variables are de-traded through Hodrick - Prescott filter. The final model equations are linearized around the steady state and using Uhlig (1999) approach, accidental equations are also linearized and are specified as space state pattern in Matlab software. Finally, the calibration of parameters are assessed, variables are simulated and compared with real data. The results show that the recommended model can simulate the impact of shocks on macroeconomic variables. It also shows that inflation rises in response to all shocks except that of technology. As the figures show, it is also revealed that non-oil output increases in response to technology, oil price, government spending and money supply.

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Monetary conditions index (MCI) is used as an intermediate target of monetary policy in many developed countries. More recently, monetary authorities in some developing countries have also attempted to use this operational target to determine the stance of monetary policy in their countries. The MCI is usually computed as a weighted sum of changes in interest rate and exchange rate. The use of interest rate in constructing MCI might not be appropriate in developing countries due to the lack of efficient financial markets in these countries. Some authors have emphasized on the role of credit channel in monetary transmission mechanism for developing countries. Using weighted sum of profit rate, exchange rate and banks credit, this paper constructs proper MCI for the Iranian economy. Aggregate demand and price equations are used to estimate the weights. Finally, the forecasting power of these indices using non-nested tests and root mean square errors is compared. The results show that the MCI augmented with banks credit has better predicting power than those without credit channel. Moreover, it is also revealed that real MCI, as an intermediate target, is preferred to nominal ones.