Dutch Disease Propagation Mechanism in the Iranian Economy: A DSGE approach

Oil shocks affect the Iranian economy through different channels. One important channel is the appreciation of the real exchange rate as a consequence of the occurrence of a positive oil (price) shock، generally known as the “Dutch disease”. This study presents a DSGE model for analysis of this particular effect as a distinct propagation mechanism in Iranian economy. The model consists of households، final and intermediate goods producers، government and the central bank. To study the propagation effects of real exchange rate appreciation، the economy has been decomposed into tradable and non-tradable sectors، each producing final and intermediate goods. We use Bayesian method to estimate model parameters. Comparison of simulated results and the actual macroeconomic variables in Iran during 1367 to 1389، indicate a relatively good fit of the model. This model and its results provide a good description of how the Dutch disease effect is propagated through the Iranian economy. The impulse-response functions indicate that، as a consequence of a positive oil (price) shock، the price of non-tradable goods increase relative to the price of tradable goods over short/intermediate run. This، in turn، induces expansion of non-tradable sector and contraction of the tradable sector. The cyclical increase in output is limited because of the compensatory effect of non-tradable goods contraction on aggregate output.