Business Cycle Accounting: The Case of Stagflation in Iran

This paper employs a quantitative business cycle approach to study the main causes of recent stagnation in Iran. Four wedges as investment, labor, productivity, and government spending are separately computed in a general equilibrium framework. These wedges, respectively represent the existing frictions in efficiency, labor market, investment and government spending; they are introduced separately or simultaneously in the basic model to specify to what extent each wedges can explain the decline in production, labor force and investment in the period of stagflation in 1390s. The findings indicate that productivity wedges alone can substantially explain the fluctuations in production, investment, and partially labor force; accordingly, the labor force wedge is the major factor in explaining the labor market fluctuations. In effect, the investment and government spending wedges do not have a prominent role in providing the explanation for fluctuations in variables in question and also for the emergence of the recent stagflation.