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Title

ASYMMETRIC PREFERENCES OF MONETARY AUTHORITIES AND INFLATION-UNEMPLOYMENT BEHAVIOR IN IRAN: A GAME THEORETIC APPROACH

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Abstract

 This paper examines for the behavior of inflation and unemployment in IRAN for the period 2005-2011. More specifically, we use a general game-theoretic model with ASYMMETRIC PREFERENCES developed by Ruge-Murcia (2003). The general model allows us to examine the predictions of the Barro-Gordon and Cukierman-Gerlach models regarding INFLATION-UNEMPLOYMENT BEHAVIOR in IRAN. We apply GARCH model to estimate conditional variance of unemployment. The model is estimated by maximum  likelihood method. Our results reject the prediction of Barro-Gordon model and support the Cukierman’s prediction regarding inflation behavior in IRAN. Moreover, the estimation results confirm the asymmetric behavior of the central bank in IRAN. In other words, our finding shows that monetary authorities are more concerned with positive deviation of unemployment from its natural rate than its negative deviation. Moreover, we find that conditional variance of unemployment is an important determinant of inflation rate in IRAN. It implies that the policymakers in IRAN might avoid further inflation by preventing fluctuations in labor market.

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