In this thesis the effect of monetary policy on GDP and inflation rate on Iranian economy is analyzed. Four monetary policy instruments such as M1 and M2, interest rate and required deposit rates are applied to analyze the most effective one. Yearly (1973 to 2006) and seasonal (1990-1 to 2006-4) time series data, both original and filtered, and the econometric method of vector autoregressive (VAR) are used to estimate the effect. The estimated results show that the variation of monetary policies such as M2 and required deposit rate are the most efficient policies affecting the GDP and inflation rate compared to interest rate and the money supply (M1). Among policies, M2 affects the inflation rate most. The policy implication for the policy maker is the inflation may be controlled most effectively through M2. Key words: Vector autoregressive, Reaction function, Exogenous Variable, Endogenous Variable.
