Evaluating the Role of Banking Facilities Distortions in the Impact of Macroeconomic Shocks within the Framework of a Dynamic Stochastic General Equilibrium Model: A Case Study of Iran

Reza Etemadpur () and Sakine Owjimehr ()
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Reza Etemadpur: PhD Candidate in Economics, Shiraz University
Sakine Owjimehr: Assistant Professor of Economics, Shiraz University

Quarterly Journal of Applied Theories of Economics, 2023, vol. 10, issue 2, 145-182

Abstract: Banking facilities distortions lead to suboptimal allocation of financial resources and impact various sectors of the economy. In this paper, a dynamic stochastic general equilibrium (DSGE) model, specifically a New Keynesian model, is designed for the Iranian economy, considering two scenarios: the presence and absence of banking facilities distortions. The model is calibrated using Monte Carlo simulation methods with the DYNARE software. The parameter values are calibrated to accurately reflect the main characteristics of the Iranian economy during the period of 1991-2021. The main objective is to examine the effects of major economic shocks on the fluctuations of macroeconomic variables under these two scenarios. The studied shocks include monetary shock, investment shock, wage mark-up shock, and government expenditure shock, which are considered as the sources of economic fluctuations in Iran. The simulation results of the effects of the monetary policy shock indicate that, assuming the absence of banking facilities distortions in the first scenario, the effectiveness of this shock increases, indicating an increased effectiveness of monetary policy in mitigating economic fluctuations. The results also show that, assuming the absence of banking facilities distortions, the economy tends to return to equilibrium faster after experiencing negative investment shocks or wage mark-up shocks, implying a reduction in the impact of these shocks. The simulation results of the effects of government expenditure shocks also demonstrate that, assuming the absence of banking facilities distortions, the effectiveness of this shock increases

Keywords: Banking facilities distortions; monetary shock; fiscal shock; DSGE (search for similar items in EconPapers)
JEL-codes: C22 C53 E32 E52 (search for similar items in EconPapers)
Date: 2023
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