Economic Research and Perspectives

Economic Research and Perspectives

Economic Impact of Financial Sanctions on Iran's Economy

Authors
leila Torki 1
Baran Mazaheri 2
1 Assistant Professor of Economics, Faculty of Administrative Sciences and Economics, University of Isfahan
2 M.A. in Economics, Department of Economics, Faculty of Administrative Sciences and Economics, University of Isfahan
Abstract
Aim and Introduction

Financial sanctions have long been a powerful tool for countries to achieve their political goals and secure their interests. Countries usually apply economic sanctions when they intend to force the target country to change certain policies that are not acceptable to the sending countries. The impact of financial sanctions may be far beyond the scope of a country's economy, so that in addition to affect the economy, it can also have a negative effect on the politics, culture, and social welfare of the target country. Iran has always been under the pressure of many sanctions. Therefore, due to the many sanctions that have been imposed on Iran over the years, the concern of many economists has always been how these sanctions affect Iran's economy. The economic and legal dimensions of sanctions as well as their diversity make it difficult to evaluate the implications related to sanctions on macroeconomic variables.
By examining the studies conducted in the field of financial sanctions and their effects on economic variables, it was found that most of these studies had investigated the effect of sanctions on two or more macro-economic variables, However, in the present study, the most important macroeconomic variables are included in the model and analyzed. Another innovation that distinguishes this research from other studies is the research method used in this research, which has not been used in Iran for the subject under study.



Methodology


First, the optimal interval of the model is determined using the Hannan-Quinn statistic, then the Bayesian vector regression model is estimated using the optimal interval, and then the effect of financial sanctions on the variables of the model is investigated. In order to create a comparative framework, the results of the Bayesian VAR model are analyzed, and the results of both BVAR and VAR models are compared. It should be noted that Eviews 12 and 16, Excel and Matlab 2021 softwares were are used to estimate the model and analyze the results and form the instantaneous response function.




Findings

After estimating the Bayesian vector auto-regression model with the SSVS prior, the results of the instantaneous response functions are as follows:

The effect of the shock on the variable of fixed investments is negative and decreasing. The effect of the shock on the price index variable of consumer goods and services is positive and increasing. The effect of the shock on the export variable is negative and decreasing. The effect of the shock on the import variable is negative and decreasing. The effect of the shock on the GDP variable is negative and decreasing. The effect of the shock on the variable of overdue loans to the private sector is positive and increasing. The shock effect in the monetary base variable is negative and increasing. The effect of the shock on the country's external debt variable is negative and increasing. The effect of the shock on the variable of the currency market pressure index is negative and increasing.

After estimating the vector auto-regression model, the results of the instantaneous response functions are as follows:

The effect of the shock on the variable of fixed investments is negative and increasing. The effect of the shock in the price index variable of consumer goods and services is negative and increasing. The effect of the shock on the export variable cannot be investigated. The effect of the shock on the import variable cannot be investigated. The effect of the shock on the GDP variable is negative and variable. The effect of the shock on the variable of overdue loans to the private sector is negative and variable. The effect of the shock on the monetary base variable is negative and variable. The effect of the shock on the country's external debt variable is negative and increasing. The effect of the shock on the variable of the currency market pressure index is positive and variable.

As it is clear from the results, the information obtained from the auto-regression vector model is very inaccurate and with high variance, and the reason for this is, as previously stated, the existence of many parameters and the reduction of the degree of freedom of the model, which causes the accuracy to decrease. The estimate as well as the dispersion function becomes instantaneous. But Bayesian models solve this problem by shrinking the model and increase the estimation accuracy. As it is clear from the instantaneous response functions obtained by this method, the graphs have less dispersion and are much closer to the middle line, and also by examining the results, it can be said that the results are consistent with experimental studies and predictions taken is closer.



Discussion and Conclusion

The lack of appropriate quantitative indicators has caused most of the studies related to the investigation of the effects of sanctions to be focused on the explanation of the channels of the impact of the sanctions on the economic environment. Sanctions affect various economic sectors such as trade, investment, employment and economic growth regardless of success or failure in achieving the ultimate goal. Therefore, for accurate policies in these areas, it is necessary to evaluate the exact amount of the effects of sanctions on these sectors based on quantitative models, along with the influence channels.

According to the results of the auto-regression Bayesian vector model with SSVS prior, financial sanctions have a negative effect on the GDP and cause it to decrease. With the decrease in the productive capacity of the economy, fixed investments also decrease. A decrease in economic growth causes a recession. A decrease in private consumption, private investment, and a decrease in economic growth can greatly strengthen the recessionary conditions, therefore, it is recommended that the government, while managing the budget, avoid excessive reductions in construction costs, so that by strengthening the effective demand in the economy, it can bring it out of stagnation.

On the other hand, financial sanctions reduce the country's exports and imports and increase the country's foreign debt. Therefore, it is suggested that the import of luxury goods, which have a high value, should be put on the agenda in the conditions of prohibited sanctions and self-sufficiency in the production of some imported products. Besides, increasing the diversification of export goods can partially compensate for the decrease in exports. In this case, the policy of supporting domestically produced goods and export-oriented goods is recommended.

Since financial sanctions increase the pressure index of the currency market, it is suggested to prevent the entry of luxury goods and to put autarky in the production of these goods. In this regard, the creation of knowledge-based companies and the creation of career guidance and specialized employment offices in universities and the policies of training human resources in the specialties needed by society should be included in the goals of the country's vision.
Keywords
Financial sanctions
Bayesian VAR model (Bayesian vector regression)
Prior SSVS function
Macroeconomic Variables

Subjects

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Economic Research and Perspectives
Volume 22, Issue 4
Winter 2023
Pages 69-98