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

Hassan Dargahi () and Mehdi Hadian ()
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Hassan Dargahi: Associate Professor of Economics, Shahid Beheshti University
Mehdi Hadian: Ph.D. Candidate in Economics, Shahid Beheshti University

Quarterly Journal of Applied Theories of Economics, 2016, vol. 3, issue 1, 1-28

Abstract: 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.

Keywords: Dynamic stochastic general equilibrium; Fiscal policy; Monetary policy; Banking system (search for similar items in EconPapers)
JEL-codes: E32 E37 E58 E62 (search for similar items in EconPapers)
Date: 2016
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