Effect of Sentiments on Macroeconomic Variables in Iran: A Dynamic Stochastic General Equilibrium Approach

Seyed Mohsen Nabavi Larimi (), Mohammad Ali Ehsani () and Hossein Tavakolian ()
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Seyed Mohsen Nabavi Larimi : University of Mazandaran
Mohammad Ali Ehsani : University of Mazandaran
Hossein Tavakolian : Allameh Tabataba'i University

Journal of Money and Economy, 2018, vol. 13, issue 1, 1-30

Abstract: This study aims to evaluate the effect of sentiments on Iran's economy through a New Keynesian Dynamic Stochastic General Equilibrium model in a closed economy. In this study, the coefficients of the proposed model are calibrated and estimated using the quarterly data of Iran's economy from 2004 to 2015. It shows that in the presence of sentiment, how stochastic impulses affect the main macroeconomic variables. Also, for more adaptation of the model to the real world, and considering the importance and role of stickiness the effect of nominal variables on production (price stickiness) is introduced to the model. In this model, the response of macroeconomic variables to exogenous shocks of idiosyncratic demand, idiosyncratic noise, monetary policy, oil revenues, government expenditures, target inflation, and technology has been evaluated. The results obtained from the review of the impulse response functions indicate that with the occurrence of idiosyncratic demand shocks and idiosyncratic noise shocks, fluctuations in the level of macro variables do not differ in terms of the sign of the initial effect. Idiosyncratic demand and noise shocks impact on output, investment, employment, and consumption has a primary positive effect; it just has negative effects on inflation; they are different in the amount of variations; so that in the case of idiosyncratic noise shock, the initial change after the shock is much higher.

Keywords: Sentiments; Expectational Shift; Idiosyncratic Shocks; DSGE (search for similar items in EconPapers)
JEL-codes: D81 D83 E2 E3 (search for similar items in EconPapers)
Date: 2018
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