The Effect of Oil Shocks and Monetary Shocks on Production and Inflation in The Housing Sector of The Iranian Economy: New Keynesian Dynamic Stochastic General Equilibrium Approach

Prices as the most fundamental variable in the housing sector have the task of optimizing the allocation of economic resources. Statistics show that during the period under the study (1991-2011), housing sector in Iran has experienced four jumps in prices. In this paper, we build a Dynamic Stochastic General Equilibrium (DSGE) model to study the fluctuations in prices and output of housing sector and identify the effects of monetary and oil price shocks on this fluctuations.
The impulse response functions show that higher money growth rate temporary increases output and inflation in the both housing and nonhousing sectors. In addition, due to the higher elasticity of supply in the nonhousing sector, the effects of monetary shock on production in this sector are more than the housing sector. Higher oil revenues through increased liquidity and then increasing demand of private sector causes higher inflation in the economy. The results show that a shock in oil revenue temporary increases production and inflation in the housing and nonhousing sector simultanously. The difference is that the inflationary effect of this shock is higher than its effect on the production.
Altogether, the comparison of the moments of the model and its impulse response functions with that of real world shows that our model can well illustrate the cyclical fluctuations of most important variables in the housing and nonhousing sectors.