Investigating the Effect of Macroeconomic Variables on Business Cycles in Iran, Markov-Switching Model Approach

Abstract

One of the key issues that economists face when analyzing the evolution of economic activity is the attempt to explain business cycles. The behavior of macro variables during the business cycles and the effect of monetary and fiscal policy on their dynamics is a key stage in understanding the role of financial markets in the real economy. Therefore, the purpose of this study is to identify business cycles by using the Markov Switching model and to examine monetary and fiscal policies that affect it. To this target, using seasonal data during the period of 1996-2016, it was found that GDP growth has three regimes with average of negative, mildly positive and high positive growth. The results of the research indicate that monetary policy and exchange rate uncertainty have a significant negative impact on economic growth in business cycles of mildly boom and depression. However, oil revenues in all three business cycle regimes have a positive and significant effect on economic growth. Also, fiscal policy (tax) as an auto stabilizer has a very small contribution to the adjustment of business cycles during the recession and economic prosperity of Iran. In general, the impact of significant variables has led to a shortening of the recession and boom in economic growth.

Keywords

• fiscal and monetary policy
• business cycle
• markov-switching
• iran economy