The effects of exchange rate shocks on output gap and inflation in Iran: a DSGE Approach

Document Type : Original Article

Authors

1 phd student

2 Bahonar University

3 uni

Abstract

The aims of this paper investigated the effect of exchange rate shock on output gap and inflation for the Iranian economy. We present a New-Keynesian DSGE model for a small open economy of Iran from 1971 until to 2018. model used in this study include: Households, Firms, Oil Sector, Government and monetary policy and foreign sector .The most important features of this study as follows: adding oil sector, Consider rigidity in the firm sector (intermediate good producers firms , exporter firms, importer firms) .The Bayesian estimation method is used to get the posterior means based on priors and the likelihood function. The impulse response functions illustrate that an increase in exchange rate shock created an increase in output and output gap in short run, that this effect will be decrease in the medium term and will be negatively affected in the long run. Exchange rate shock has a positive effect on inflation and inflation gap in short run but they are not very strong in the early periods in the later and mid-term periods, the incremental effects of exchange rate shocks on inflation and inflation gap stronger.

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References

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Economic Strategy
Volume 9, Issue 35 - Serial Number 35
November 2020
Pages 263-292

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