The analysis of the macroeconomic effects of defense spending for Iran by using a dynamic stochastic general equilibrium model

Security concerns motivate countries to allocate a significant portion of their financial resources towards defense spending. This renders the defense sector an important role which directly and indirectly affects its respective country’s economy, including that of Iran’s. The significance of this sector has been highlighted and emphasized in various upstream documents and programs of I.R.I. Using a dynamic stochastic general equilibrium model, the objective of this study was to examine some of the effects of defense spending on the Iranian economy, specifically, elucidating the effects of the governmental budget allocated to this sector on macroeconomic variables. The results indicate both households and firms positively benefit from exogenous government defense spending shocks. This matter is illustrated in growths in the GDP (including the oil sector), and also, the GDP excluding the oil sector. Even though in short-term defense spending means an initial decrease in consumption and private sector investment, in the long-term, business environment will improve due to enhancements in security which reduce economic uncertainty, which in turn leads to improvements and growth in consumption and private investment.