Simulating the Effects of Macroeconomic Shocks on Agricultural Sector: Dynamic Stochastic General Equilibrium (DSGE) model approach

Knowing type of the effects of economic shocks and uncertainties over economic body is a suitable guide to make proper decisions in the event of economic shocks. Given the importance of the agricultural sector, the present study examines the effects of macroeconomic shocks: (including agricultural productivity, monetary, oil revenues and government spending shocks) on Iran’ agricultural sector. To this end we construct a Dynamic Stochastic General Equilibrium (DSGE) model emphasizing on agricultural sector, considering Iran’s Economic realities based on data from the period 1991-2013. The results show that a positive productivity shock has a positive effect on agricultural output (2.06%), employment (0.23%), capital (1.46%), real wages (0.33%) and home consumption goods (1.33%) and a negative effect on marginal cost, price indexes and imported consumption goods. Positive monetary shock leads to an increase in all agricultural variables except real wages. Following a positive oil revenue; output (0.73%), employment (0.087%), real wages (0.68%) and price indexes fall. In response to an increase in government spending capital (0.28%) and real wages (0.18%) decrease. The results, further, show that the effects of agricultural productivity shock are more persistent and desirable when compared to those of other shocks and in magnitude, generally, the greatest responses are of the shock. On the contrary, positive oil revenue shock has the most negative effects on agricultural sector. Given the negative effects of the oil revenue shock, the government should allocate a share of foreign exchange earnings arising from a positive oil shock to be spent on supporting and strengthening agriculture instead of importing agricultural consumption goods and weakening it.