Designing a New Keynesian Dynamic Stochastic General Equilibrium Model for Iran's Economy with Banking Sector

Abstract

Owing to importance of monetary and financial aspects of macroeconomic fluctuations, and the role of financial intermediaries, in this paper, we design a new Keynesian Dynamic Stochastic General Equilibrium (DSGE) model with regard to banking, to analyze the effect of oil, productivity and monetary shocks on Iran's economy. The effects of those shocks on different variables of the model appear to be consistent with our theoretical expectations and Iran's economy. In fact, inclusion of the banking sector in the model contributes positively to better explanation of Iran's business cycle features. By applying the model, we find that outstanding claims of banking sector reduce the impact of monetary shocks. Therefore, outstanding claims of banking sector is likely to weaken the efficiency of discretionary monetary policy against macroeconomic fluctuations.

Keywords

• dynamic stochastic general equilibrium model
• iran's business cycles
• iran's macroeconomic fluctuations
• monetary shocks
• dsge model