Modeling Markup Shocks Using DSGE Model:The Case of Iran

This paper investigates the effects of markup shocks of domestic and export goods prices on macroeconomic variables by using a Dynamic Stochastic General Equilibrium (DSGE) model for Iran, in order to examine the effect of the growth of market power and monopoly in domestic and exporting markets from a macroeconomic viewpoint. To this end, the optimal pricing process of domestic, importing and exporting firms is modeled in Calvo price stickiness (1983) framework, by specifying the dynamic behavior of markup shocks including random walk processes for these shocks. The simulation results and dynamic analysis of shocks show that the positive shock of domestic price markup has a negative significant effect on investment, consumption, domestic marginal cost and production in the short run. On the other hand, a positive shock of the domestic markup has positive and short-run effect on imports and exports. Also, a positive shock of exporting goods price markup decreases the investment, domestic marginal cost, exports and production in short run. Based on the findings of this research, the markup shocks, as one of the causes of the growth of market power and monopoly, have a destructive effect on production, consumption and investment in Iran. Hence, in order to control market power and monopoly, it is necessary to approve and enforce antitrust and anti-monopoly policies and regulations.