Analyzing the effect of monetary and fiscal policies on Iran’s foreign trade using DSGE approach
- DSGE, Monetary policy, Fiscal policy, rigidity, Export, Import, oil
Due to such implications as increased inflation and decreased real exchange rate, there has always been controversy about the implementation of monetary and fiscal policies. This paper aims to analyze the effects of monetary shocks and government expenditures on macroeconomic indicators of Iran (especially on import and export) using the DSGE new Keynesian open economy model. For this purpose, a DSGE model is developed according to the characteristics of Iran’s economy, such as the presence of oil sector and the rigidities. The model parameters are estimated for the time span of 1972 to 2014, where some parameters are calibrated and others are calculated using the Bayesian method. The results obtained from the impulse response functions, indicate that the positive base money growth rate shock will lead to increased imports, decreased exports and deteriorated non-oil trade balance. Also theoretically, it will increase inflation, production, investment and employment. The positive government expenditure shock causes inflation, which will decrease the real exchange rate. This in turn will reduce non-oil exports and will increase imports, which will finally deteriorate non-oil trade balance of the country. On the other hand, the increased government expenditures will increase the production, but part of this growth will be crowded out because of reduced private investment.