Evaluating the Financial Frictions Effects on Macroeconomic Variables of Iran: A DSGE Approach

The conditions of the financial markets and institutions have made the effectiveness mechanism of economic policies more complicated so that evaluating the movements of economic variables, without considering the effects of financial frictions is not enough. Therefore this paper examines the effect of monetary, technology, investment efficiency, money demand and household’s preferences shocks on macroeconomic variables in Iran by considering the financial friction. In this regard, we design a Dynamic Stochastic General Equilibrium model (DSGE) for Iran and for estimating structural parameters of model use Bayesian procedure for seasonally data from 1995 to 2015. The results of the model estimation show that the instantaneous response functions of the variables to these shocks are in accordance with theoretical expectations and data, but the presence of financial frictions amplify the effect of some demand side shocks on macro variables, especially investment and prices of capital. On the other hand, the existence of financial frictions dampens the effects of supply shocks (positive technology shock) on variables in particular investment, and prevents it from increasing in comparison to the model without financial frictions.