Evaluation of Fiscal and Monetary Shocks with Emphasis on the Interactions of Banking System Balance Sheet and the Real Sector of Iran's Economy: A DSGE Approach

In this paper, we evaluate the impacts of monetary and fiscal shocks on fluctuations of macroeconomic variables. Due to the importance of the financial sector in transmitting the effects of economic policies, the banking system and its current features such as fixed asset accumulation and NPLs has been added to the baseline model. Calibration of the parameters according to the quarterly data of Iran economy during 1990-2014 shows that the model fits the data quite satisfactory. We find that a negative shock to required reserve ratio results in slight output growth and moderate inflation. Moreover, a positive shock to government development payments results in inflation and output growth. Overall, the results indicate that incorporating banking system in macroeconomic modeling provides policymakers with more information for analyzing business cycles due to considering the interactions of balance sheet effect of banking system and the real sector, which is not available in competing models.