Investigating Effects of Balance of Payments Shocks on Welfare Loss in the Iranian Economy: A DSGE Model

Generally, the various economies can be affected by balance of payments shocks based on their structures. The purpose of the paper is to evaluate the effects of different balance of payments shocks including shocks of oil export, non-oil export, consumption import, intermediate import, and capital import on the welfare losses. It should be mentioned that the macroeconomic environment of a country can be effective in deepening or reducing the impact of balance of payments shocks. For this purpose, based on the New Keynesian approach, a dynamic stochastic general equilibrium model has been developed and simulated for Iran's economy. The results show that the real exchange rate is the most important channel in transmission of balance of payments shocks. Also, the shocks of oil and non-oil exports cause the biggest welfare losses, respectively. Moreover, the results of import shocks mention that although the output loss caused by the shocks of intermediate and capital imports as production inputs is important, but the shock of consumption import through the real exchange rate fluctuations causes the more welfare losses than other type of imports. Hence, to reduce the welfare losses caused by the balance of payments shocks, stabilization of the foreign exchange revenues from oil exports, diversification of the non-oil exports along with the promotion of domestic production and stabilization of the real exchange rate by conducting proper monetary and fiscal policies, are necessary.