Designing a Dynamic Stochastic General Equilibrium Model of Open Economy to Examine the Impact of Oil Price Shocks on Macroeconomic Variables

In this paper we will investigate the impact of price and production shocks of crude oil on macroeconomic variables in Iran using an open economy DSGE model. To this end, the transmission channels of oil shocks have been specified in accordance with the structure of the Iran economy. Simulation results of the model show that oil shocks has negative effect on output, investment and capital stock, but cause increase in inflation, consumption and marginal cost. On the other hand, oil shocks have a positive effect on government spending and money supply. These results confirm the hypothesis of the resource curse in the economy of Iran and show that oil shocks played a key role in shaping monetary and fiscal policies and inflation. Hence in order to avoid bad consequences resulting from oil shocks, it is suggested that Central Bank keeps its supervision on the exchange reserve account and national development fund. Furthermore, it is suggested that there should be mechanisms to reduce the dominance of the government on Central Bank and maintaining authenticity of Central Bank in doing its two main tasks: keeping the value of the national currency and controlling inflation.