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An Investigation of Economic Factors Affecting Output Gap in the Iranian Economy

Seyyed Abdolmajid Jalaee (), Alireza Shakibaee (), Mehdi Nejati () and Moslem Ansari Nasab ()
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Seyyed Abdolmajid Jalaee: Professor of Economics, Shahid Bahonar University
Alireza Shakibaee: Associate Professor of Economics, Shahid Bahonar University
Mehdi Nejati: Assistant Professor of Economics, Shahid Bahonar University
Moslem Ansari Nasab: Ph.D. Candidate in Economics, Shahid Bahonar University

Quarterly Journal of Applied Theories of Economics, 2017, vol. 3, issue 4, 77-100

Abstract: Due to the importance of production in economy, its volatility affect economic sectors and agents significantly. Therefore, understanding the causes of business cycles is very important. Thus, this study extracted business cycles and investigated the effects of aggregate demand variables cycles in business cycle and the size of this effects in Iran’s economy over 1959-2014. For this purpose, first Hodrick-Prescott filter and then Markov-switching model are used to extract and examine the business cycles. The results showed asymmetry in the production cycles in Iran’s economy. The results of the regime of recession and expansion probability also revealed that although with less intensity, cycles of recession are more probable compared to expansion cycles, and have happened in longer period. Then, using the relevant indicators and Hsiao's causality tests, we focused on the relationship of demand side variables cycle with business cycles. The results indicated that the three variables including consumption, investment and government spending were all leading and coincident to business cycles. There was a two-way causality relationship between all three variables and the business cycles. However, balance of trade was found to be lagging and non-coincident to business cycles. It was also found that the causality runs only from balance of trade to business cycles.

Keywords: Business cycles; Demand side cycles; Hodrick–Prescott filter; Markov Switching model; Hsiaos Granger causality test (search for similar items in EconPapers)
JEL-codes: C20 C50 E30 O30 (search for similar items in EconPapers)
Date: 2017
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