The Dynamic General Equilibrium Model for the Business Cycle of IRAN

Abstract

In this study, by making adjustments in the real business cycle models in a small open economy, a dynamic stochastic general model has been developed for the first time to study the business cycle prosperities of Iran. The findings of this research show that by viewing only the technologic shock, the volatilities in the macro variables fluctuations of the model will be much lower than the values observed for the economy of Iran, and by considering the role of oil prices shocks, the results of the model have better compatibility with the observations made in the economy of Iran and could explain some properties of the business cycles of Iran’s economy. The findings show that with a positive oil shocks, there will be an increase in consumption, investment and production and the results of the model are similar to those of real observations in the economy of Iran. The shocks in the global real interest rate have slight and trivial effects on production, consumption and investment. In addition, the results show that changes in the cyclic fluctuations in variables such as consumption, investment, production and the trade balance obtained by the model is slightly different from changes observed in the Iran’s economy. In the model, correlation and co-movement of consumption, investment and imports have been seen like real observations.