Analyzing the effect of monetary and fiscal policies on Iran's foreign trade using DSGE approach

The implementation of monetary and fiscal policies has always been the subject of controversy due to their effects and consequences such as inflation and the fall of the real exchange rate. This paper aims to analyze the effects of monetary shocks and government expenditures on macroeconomic indicators of Iran (especially on import and export) using the new DSGE Keynesian open economy model. For this purpose, a DSGE model is developed according to the characteristics of Iran’s economy, such as the presence of oil sector and the rigidities. In this paper, the model parameters are estimated for the time span of years 1972 to 2014, which some of them are calibrated and the others are calculated using the Bayesian method.The results obtained from the impulse response functions, indicate that positive base money growth rate shock will lead to increase in the imports, decrease in the exports and deterioration in the non-oil trade balance. Also according to the theories it will increase the inflation, production, investment and employment. The positive government expenditures shock causes inflation, which will decrease the real exchange rate. This in turn will reduce the non-oil exports and will increase the imports, which finally deteriorates the non-oil trade balance of the country. On the other hand, according to the theories the increase in government expenditures will increase the production, but part of this growth will be crowded out because of the reduction in the private investment (substitution with government expenditures).