Sentiment and Aggregate Demand Fluctuations in Iran: A Stochastic Dynamic General Equilibrium Approach

The literature on sentiments is relatively new. In this study, the effect of sentiments on the Iranian economy in the framework of presenting a new Keynesian dynamic stochastic general equilibrium model is investigated. Two models are considered for the Iranian economy with and without sentiments. Proposed model coefficients are calibrated and estimated using the quarterly data of Iran's economy from 2004 to 2015 and show how stochastic impulses affect key macroeconomic variables in the presence of sentiments. 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 the following, we evaluate how macroeconomic variables respond to different shocks. The results of the impulse response functions show that the initial impact of all the shocks on output is positive but only the effect of the target inflation and monetary policy shocks is positive and the other shocks have a negative effect. These shocks also have different effects on other macroeconomic variables. Comparing the two models with and without sentiment reflect differences in the effectiveness of the two case.