The Role of Economic Complexity on Output and Inflation Volatilities in Iran

High volatilities of output and inflation in an economy have negative effects on economic growth, and also cause an uncertain economic environment. Economic complexity is one of the factors affecting changes in macroeconomic variables. By increasing economic complexity, the technological structure of production changes, and there is a movement of production resources between production activities. Therefore, this study investigates the relationship between the economic complexity index and volatility of output and inflation using the system of simultaneous equations during 1978-2019. The results of the estimation show that the increase of economic complexity would result in the decrease of output volatility by 0.121% and the decrease of inflation volatility by 0.106%. Additionally, the variables of government expenditure and trade openness, included as control variables in the equation of output volatility, have a positive effect. Moreover, the variable of exchange rate has a positive effect in the inflation volatility equation. From a policy-making perspective, based on the results of this research, it is suggested that economic complexity, through increasing products variety and promoting more specialized and knowledge-based production, can effectively contribute to economic stability and create conditions for further economic growth and development.