Impact of Fiscal and Monetary Shocks on Macroeconomic Variables in Iran, Dynamic Stochastic General Equilibrium Approach 1961-2012

This paper studies impacts of monetary and fiscal shocks on macroeconomic variables in Iran. For this purpose, a dynamic stochastic general equilibrium approach is employed to sketch an appropriate model for Iranian economy. To calculate the required coefficients, data of the period 1961-2012 released by the Central Bank of Iran are gathered. In order to take in consideration the Iranian economic characteristics, oil revenues, sticky prices, monetary policy, fiscal policy, and technology are considered in the model. Results indicate that technological shocks increase non oil production, private investment consumption, and GDP. So, technological shocks increase economic growth and reduce inflation. Increase in oil revenues promotes non-oil production, private consumption, government expenditure, and private investment. So, in short run, the impact of oil shock on economic growth is positive. But oil shock increases inflation via an increase in money base. Monetary shocks (increase in money base) increase internal consumption and money liquidity (the inflation) and somehow the GDP. But, monetary shocks have small effects on the non oil production. In sum, monetary shock has a small positive impact on economic growth. So, in short run, money neutrality hypothesis cannot be retained. Also, government expenditure shock increases government expenditures, private consumption, and decreases private investment. In sum, government expenditure shock has a positive effect on production, inflation and economic growth.