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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

Author

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  • Dargahi, Hassan

    () (Associate Professor of Economics, Shahid Beheshti University)

  • Hadian, Mehdi

    () (Ph.D. Candidate in Economics, Shahid Beheshti University)

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.

Suggested Citation

  • Dargahi, Hassan & Hadian, Mehdi, 2016. "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," Quarterly Journal of Applied Theories of Economics, Faculty of Economics, Management and Business, University of Tabriz, vol. 3(1), pages 1-28, June.
  • Handle: RePEc:ris:qjatoe:0032
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    More about this item

    Keywords

    Dynamic stochastic general equilibrium; Fiscal policy; Monetary policy; Banking system;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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