A dynamic stochastic general equilibrium model for an oil exporting and small open economy: the case of Iran

In this paper we specify and estimate a dynamic stochastic general equilibrium (DSGE) model for an oil exporting and small open economy in accordance with the structure of the Iranian economy. The paper aims to examine the effects and also the mechanism of monetary, fiscal, oil export revenues and foreign exchange shocks on real and nominal macroeconomic variables. Our simulation results show that about 40 percent of any monetary base growth leads to inflation. Fiscal policy stimulates aggregate demand and increases inflation as well. But, the intensity and the amount of influence of current and development budget is not the same, the effect of development budget depends on the length of delays in implementation of state projects. Most of the macroeconomic variables are affected as a result of an oil shock due to dependency of Iran's economy on petro dollars. Although most of the economic operation use official exchange rate, parallel exchange rate affects significantly on the real and nominal variables due to private sector expectations. The details and the exact amount of effects of each shocks is presented in the full text of the paper.In this paper we specify and estimate a dynamic stochastic general equilibrium (DSGE) model for an oil exporting and small open economy in accordance with the structure of the Iranian economy. The paper aims to examine the effects and also the mechanism of monetary, fiscal, oil export revenues and foreign exchange shocks on real and nominal macroeconomic variables. Our simulation results show that about 40 percent of any monetary base growth leads to inflation. Fiscal policy stimulates aggregate demand and increases inflation as well. But, the intensity and the amount of influence of current and development budget is not the same, the effect of development budget depends on the length of delays in implementation of state projects. Most of the macroeconomic variables are affected as a result of an oil shock due to dependency of Iran's economy on petro dollars. Although most of the economic operation use official exchange rate, parallel exchange rate affects significantly on the real and nominal variables due to private sector expectations. The details and the exact amount of effects of each shocks is presented in the full text of the paper.