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Showing 15 results for Dynamic Stochastic General Equilibrium
Dr Farideh Khodadadi, Dr Hossein Samsami,
Volume 0, Issue 0 (12-2024)
Volume 0, Issue 0 (12-2024)
Abstract
Aim and Introduction
The financial sector has seen considerable growth in many post World War II western economies. The consequences of the Great Financial Crisis of 2007-2009 displayed how large the reach of the industry is, and how actions taken by a few important role players, can harm the general public. It is due to the consequences of the Great Financial Crisis that the notion of reforming the banking sector came about. The call for reform occurred in the 1940s as well, after the Great Crash. It was here that Full Reserve Banking (FRB), the broad term for the proposed banking reform and the subject of this dissertation, originated.
The Great Crash ended a period of expansion and growth in the USA in the 1920s where credit was easily available, and the money supply grew. The subsequent Great Depression was an economic event of unprecedented dimensions (Temin, 2000). The years 1929-1933 held a stock market crash, a banking crisis, and a collapse of commodity prices. Friedman and Schwartz (1963) contended that the primary propagation mechanism of the Depression was the contraction in the US money supply, together with banking panics. There were three banking crises in that short period, and it was the failure of two large banks, the Bank of United States and Caldwell and Company, that caused most of the problem. These banks had undergone rapid credit expansion in the 1920s and collapsed under the pressure of the recession (Temin, 2000: 307). A response to the recession was to say that the root cause was bad banking practice and that stricter regulations should be imposed to prevent future crises. Regulation was introduced in The Glass-Steagall Act (1933) however, a more severe suggestion was that bank deposits should be fully backed by bank reserves, Full Reserve Banking, an approach proposed in the Chicago Plan.
The Chicago Plan was proposed by Henry Simons, Irving Fisher and others, to prevent another crisis. It proposed requiring banks to hold 100 per cent reserves. This would simultaneously curb the possibility of reckless lending, and eliminate the risk of bank runs, thereby eliminating the possibility of another banking crisis.
Over the past years, the nominal capacity of the supply of bank facilities has increased significantly, and the main increase in bank assets has come from the increase in granting facilities. On the liabilities side of the banks' balance sheets, non-governmental sector deposits (due to paying high interest rates to depositors) during the year 2013 to 2022 has increased by 33.6% on average.
Statistical evidence shows that the real sector of the economy has not benefited much from the expansion of the banking network's balance sheet and the allocation of bank resources has not led to economic growth. On the other hand, it can be seen that the liquidity created by the banking system has not been absorbed by the real sector of the economy and its effects have been manifested in nominal variables in the form of price increases or turbulences in the currency market and other assets. The average growth of real GDP (without oil) during the years 2013 to 2022 was about 1.6 percent.
In general, it can be seen that due to the endogenous nature of money, the central bank has not had a significant success in controlling the growth of monetary aggregates through controlling the growth of the monetary base and its components (statistical evidence in recent decades confirms this); So that the credibility of the central bank's monetary policies has been challenged and the economy has been exposed to continuous threats of inflation and monetary and financial instabilities.
Methodology
This study will employ several techniques for gathering data, including a library type, a documentary branch, and the use of databases, such as those of the Central Bank of the Islamic Republic of Iran and the World Bank. Based on the characteristics of the Iranian economy under fractional & full reserve banking, a random dynamic general equilibrium model was developed for the period 1991-2021. Typical econometric methods are also used to evaluate the hypotheses. This has enabled assessing the effects of the exchange rate shock under two scenarios. It should be noted that the models were estimated in the dynare program space under MATLAB software.
Findings
The exchange rate shock has a negative effect on the consumption of the private sector at real prices, probably due to an increase in import prices. This has led to a decrease in the import of goods. Since imports form a part of the consumption for the private sector, therefore, the consumption by this sector decreases by about 0.5 percent. The Exchange rate shock has had a positive effect on the net foreign exchange reserves of the central bank. The growth rate of the monetary base is also affected by the currency shocks. With the increase in the exchange rate, although the central bank first reacts to the inflationary conditions resulting from the currency shocks through the currency reaction function and reduces the base monetary growth rate, but this situation is not very durable and finally the monetary base growth rate will increase by about 0.4 percent.
If these resources enter the banking system, due to the 100 percent reserve, it has led to the crediting of the banks, and as a result, inflation and final costs have decreased. But in fractional reserve banking, banks create money by attracting deposits, which in turn creates money by them. As a result of this jump, inflation and the final cost will increase.
The exchange rate shock also increases inflation because with the increase in the nominal growth rate of the exchange rate, the marginal cost of each import unit increases and finally the country's inflation increases by 0.7 percent.
Discussion and Conclusion
The purpose of this research is to investigate the effects of exchange rate impulse on the macroeconomic variables of Iran's economy in the conditions of partial and full reserve banking. To achieve this goal, a new Keynesian stochastic dynamic general equilibrium model was designed considering fractional and full reserve banking system (FRB). The realities of the Iranian economy are considered, and then the effects of exchange rate shocks under two types of banking are investigated. After determining the input values of the model and estimating the parameters using the seasonal data of Iran's economy during the period of 1991-2022 using the Bayesian estimation method, the results obtained from the simulation of the model variables indicate the validity of the model in describing the fluctuations of the Iranian economy. The results of the model indicate that, as a result of the exchange rate shock, the growth rate of the monetary base and consequently the amount of money is affected. Under full reserve banking, due to the full reserve of deposits, this has led to a lower increase in inflation and final cost. However, in partial reserve banking, due to the less control of the banking system, despite having two tools to control the growth of the monetary base and the nominal exchange rate, it will create higher fluctuations in the inflation rate and other macroeconomic variables. In other words, the study model has been slightly different from the basic model in the face of the currency impulse, both in terms of the amplitude and the length of the fluctuation
The financial sector has seen considerable growth in many post World War II western economies. The consequences of the Great Financial Crisis of 2007-2009 displayed how large the reach of the industry is, and how actions taken by a few important role players, can harm the general public. It is due to the consequences of the Great Financial Crisis that the notion of reforming the banking sector came about. The call for reform occurred in the 1940s as well, after the Great Crash. It was here that Full Reserve Banking (FRB), the broad term for the proposed banking reform and the subject of this dissertation, originated.
The Great Crash ended a period of expansion and growth in the USA in the 1920s where credit was easily available, and the money supply grew. The subsequent Great Depression was an economic event of unprecedented dimensions (Temin, 2000). The years 1929-1933 held a stock market crash, a banking crisis, and a collapse of commodity prices. Friedman and Schwartz (1963) contended that the primary propagation mechanism of the Depression was the contraction in the US money supply, together with banking panics. There were three banking crises in that short period, and it was the failure of two large banks, the Bank of United States and Caldwell and Company, that caused most of the problem. These banks had undergone rapid credit expansion in the 1920s and collapsed under the pressure of the recession (Temin, 2000: 307). A response to the recession was to say that the root cause was bad banking practice and that stricter regulations should be imposed to prevent future crises. Regulation was introduced in The Glass-Steagall Act (1933) however, a more severe suggestion was that bank deposits should be fully backed by bank reserves, Full Reserve Banking, an approach proposed in the Chicago Plan.
The Chicago Plan was proposed by Henry Simons, Irving Fisher and others, to prevent another crisis. It proposed requiring banks to hold 100 per cent reserves. This would simultaneously curb the possibility of reckless lending, and eliminate the risk of bank runs, thereby eliminating the possibility of another banking crisis.
Over the past years, the nominal capacity of the supply of bank facilities has increased significantly, and the main increase in bank assets has come from the increase in granting facilities. On the liabilities side of the banks' balance sheets, non-governmental sector deposits (due to paying high interest rates to depositors) during the year 2013 to 2022 has increased by 33.6% on average.
Statistical evidence shows that the real sector of the economy has not benefited much from the expansion of the banking network's balance sheet and the allocation of bank resources has not led to economic growth. On the other hand, it can be seen that the liquidity created by the banking system has not been absorbed by the real sector of the economy and its effects have been manifested in nominal variables in the form of price increases or turbulences in the currency market and other assets. The average growth of real GDP (without oil) during the years 2013 to 2022 was about 1.6 percent.
In general, it can be seen that due to the endogenous nature of money, the central bank has not had a significant success in controlling the growth of monetary aggregates through controlling the growth of the monetary base and its components (statistical evidence in recent decades confirms this); So that the credibility of the central bank's monetary policies has been challenged and the economy has been exposed to continuous threats of inflation and monetary and financial instabilities.
Methodology
This study will employ several techniques for gathering data, including a library type, a documentary branch, and the use of databases, such as those of the Central Bank of the Islamic Republic of Iran and the World Bank. Based on the characteristics of the Iranian economy under fractional & full reserve banking, a random dynamic general equilibrium model was developed for the period 1991-2021. Typical econometric methods are also used to evaluate the hypotheses. This has enabled assessing the effects of the exchange rate shock under two scenarios. It should be noted that the models were estimated in the dynare program space under MATLAB software.
Findings
The exchange rate shock has a negative effect on the consumption of the private sector at real prices, probably due to an increase in import prices. This has led to a decrease in the import of goods. Since imports form a part of the consumption for the private sector, therefore, the consumption by this sector decreases by about 0.5 percent. The Exchange rate shock has had a positive effect on the net foreign exchange reserves of the central bank. The growth rate of the monetary base is also affected by the currency shocks. With the increase in the exchange rate, although the central bank first reacts to the inflationary conditions resulting from the currency shocks through the currency reaction function and reduces the base monetary growth rate, but this situation is not very durable and finally the monetary base growth rate will increase by about 0.4 percent.
If these resources enter the banking system, due to the 100 percent reserve, it has led to the crediting of the banks, and as a result, inflation and final costs have decreased. But in fractional reserve banking, banks create money by attracting deposits, which in turn creates money by them. As a result of this jump, inflation and the final cost will increase.
The exchange rate shock also increases inflation because with the increase in the nominal growth rate of the exchange rate, the marginal cost of each import unit increases and finally the country's inflation increases by 0.7 percent.
Discussion and Conclusion
The purpose of this research is to investigate the effects of exchange rate impulse on the macroeconomic variables of Iran's economy in the conditions of partial and full reserve banking. To achieve this goal, a new Keynesian stochastic dynamic general equilibrium model was designed considering fractional and full reserve banking system (FRB). The realities of the Iranian economy are considered, and then the effects of exchange rate shocks under two types of banking are investigated. After determining the input values of the model and estimating the parameters using the seasonal data of Iran's economy during the period of 1991-2022 using the Bayesian estimation method, the results obtained from the simulation of the model variables indicate the validity of the model in describing the fluctuations of the Iranian economy. The results of the model indicate that, as a result of the exchange rate shock, the growth rate of the monetary base and consequently the amount of money is affected. Under full reserve banking, due to the full reserve of deposits, this has led to a lower increase in inflation and final cost. However, in partial reserve banking, due to the less control of the banking system, despite having two tools to control the growth of the monetary base and the nominal exchange rate, it will create higher fluctuations in the inflation rate and other macroeconomic variables. In other words, the study model has been slightly different from the basic model in the face of the currency impulse, both in terms of the amplitude and the length of the fluctuation
Mahmoud Motavaseli, Ilnaz Ebrahimi, Asghar Shahmoradi, Akbar Komijani,
Volume 10, Issue 4 (1-2011)
Volume 10, Issue 4 (1-2011)
Abstract
This paper develops a New Keynesian dynamic stochastic general equilibrium (DSDE) model to study Iran's economy. The model considers the dependence of Iran's economy to oil exports. Oil sector and oil export revenues have been modeled as a separate sector and one of the government budget resources, respectively. In this model, like in other New Keynesian DSGE models, firms face nominal rigidities and the intermediate-good sector is monopolistically competitive. Four shocks (productivity, oil revenues, money growth rate and government expenditure) have been introduced as the sources of volatility. The findings show that business cycle moments generated by the model and those of actual statistics from the economy are closely related. The model produces more volatile private investment and less volatile private consumption than non-oil output. Impulse response functions of shocks show that non-oil output increases in response to productivity, oil revenues, money growth rate and government expenditure shocks. Although non-oil output increases in response to government expenditures shocks, crowding- out effect of these expenditures causes output to decrease after some periods.
Seyed Fakhredin Fakhrehosseini, Asghar Shahmoradi, Mohammad Ali Ehsani,
Volume 12, Issue 1 (5-2012)
Volume 12, Issue 1 (5-2012)
Abstract
Fluctuations in fiscal policy affect monetary policy and the central bank, because the government’s general budget is highly dependent on oil prices and its fluctuations. Therefore, this paper designs a New Keynesian model for Iran with nominal rigidities (prices and wages) and analyzes the impact of technology, oil price, government spending and money supply shocks on macroeconomic variables (inflation, output) in economy of Iran. The data in this article are related to the fixed prices in the year 2004 and run annually from 1966 to 2008 on a per capita basis. Having logarithms taken, the variables are de-traded through Hodrick - Prescott filter. The final model equations are linearized around the steady state and using Uhlig (1999) approach, accidental equations are also linearized and are specified as space state pattern in Matlab software. Finally, the calibration of parameters are assessed, variables are simulated and compared with real data. The results show that the recommended model can simulate the impact of shocks on macroeconomic variables. It also shows that inflation rises in response to all shocks except that of technology. As the figures show, it is also revealed that non-oil output increases in response to technology, oil price, government spending and money supply.
Marzieh Esfandyari, Nazar Dahmardeh, Hossein Kavand,
Volume 14, Issue 1 (3-2014)
Volume 14, Issue 1 (3-2014)
Abstract
The substantial share of informal employment in Iran, on the one hand and the growing use of dynamic stochastic general equilibrium models in analyzing economic policies by central banks and eliminating the flaws of these models, on the other hand, necessitate designing a dynamic stochastic general equilibrium model with dual labor market based on Iran's economy. To do so, the current study divides labor market into formal and informal sectors. In addition, it classifies firms in formal and informal ones regarding the type of the production function and labor. The annual data used in the model are collected from the Central Bank and the Statistical Center of Iran during 1974-2010. After calibrating and solving the model with numerical method, the shock effects of total factors productivity, government expenditure, oil revenue, and money growth on real variables of the model have been analyzed with and without nominal wage rigidity. The results of the study suggest that the informal sector of the labor market in different business cycles acts as a buffer with countercyclical shift. The money is not neutral in the short run due to lack of rigidity in a model of monopolistic competition, so money supply affects real variables of economy.
Bahram Sahabi, Hossein Asgharpur, Saeed Qorbani,
Volume 17, Issue 2 (6-2017)
Volume 17, Issue 2 (6-2017)
Abstract
The issue of asymmetric effects of monetary shocks on the economy is among the new topics that have been studied by the New Keynesians. How to monetary shocks affect macroeconomic variables such as gross domestic product (GDP), prices, private investment in terms of nominal and real sectors, and economic policy-making is of great importance. In this study, according to the New-Keynesian assumptions, the effects of asymmetry in monetary shocks are examined using dynamic stochastic general equilibrium model in Iran's economy during 1979-2012. The results indicate that positive and negative monetary shocks are endogenous and depend on inflationary regimes in the Iranian economy, so that the effects of positive and negative shocks on GDP and private investment in the low inflation regime are more than those of high inflation regime. In addition, the effects of positive and negative shocks on the general prices' level in the high inflation regime are higher than those of low inflation regime.
Parviz Rostamzadeh, Yazdan Goudarzi Farahani,
Volume 17, Issue 4 (3-2018)
Volume 17, Issue 4 (3-2018)
Abstract
This paper aims to examine the replacement oil revenues with tax revenues in the Iranian economy. For this purpose, using dynamic stochastic general equilibrium (DSGE) approach, a small open economy model consisting of two tradable and non-tradable production sectors is designed. In government revenue side, various taxes such as consumption tax, and income tax arising from the supply of labor and capital rent are included in the model. Model parameters were estimated by Bayesian approach using quarterly data for the period 1988-2014. Two scenarios were designed in order to replace oil revenues with tax revenues. In the first scenario, the government only receives oil incomes, and oil price is determined exogenously. In the second one, oil earnings are totally saved in the National Development Fund (NDF), and government spends only tax revenues to meet current and capital expenditure. The results indicate negative impact of higher taxes on macroeconomic variables such as economic growth and private consumption in the short-term and positive impact on GDP, consumption and investment in the long- term.
Zahra Afshari, Hossein Tavakolian, Marziyeh Bayat,
Volume 18, Issue 2 (7-2018)
Volume 18, Issue 2 (7-2018)
Abstract
This article attempts to examine the impact of stock market fluctuations on macroeconomic variables by designing a New Keynesian approach in a dynamic stochastic general equilibrium (DSGE) model. For this purpose, first, model parameters are estimated based on Bayesian approach and using of quarterly data from 1994 to 2014. Second, the impulse response functions of variables to innovations in stock price index, monetary shock, technology shock, consumer spending and public investment are investigated. Then, the optimal weights related to inflation gap, output gap and the stock price index gap within the monetary policy function are extracted. According to the results, a shock to stock price index has a negligible effect on inflation and output variables. This may be due to the small size of the stock market in Iran. Finally, the optimal coefficients are determined for inflation and output gaps, stock price index gap, and the central bank deadweight loss under various scenarios. Based on findings, first, the central bank should attribute more weight to inflation in itself reaction functions. Second, a scenario in which the weight of stock price index is zero has less deadweight loss, thus the response of the central bank to stock price index gap leads to a reduction in social welfare. Therefore, when the stock market is booming, the central bank is recommended not to be intervened to reduce liquidity.
Matin Sadat Borghei, Dr Teimoor Mohammadi,
Volume 18, Issue 2 (7-2018)
Volume 18, Issue 2 (7-2018)
Abstract
The main goal of this paper is to analyze the exchange rate pass-through, the relationship between exchange rate and prices, provided that a shock occurs and changes exchange rate and prices. The key point in this study is that exchange rate is considered as an endogenous variable. This issue is important because exchange rate pass-through due to specific shocks differs from case to case. Hence a dynamic stochastic general equilibrium model is presented and simulated for Iran. The accuracy of the model is analyzed by comparing the moments of the model and the moments of the quarterly data from 1988 to 2010. Then, exchange rate pass-through conditional on each shock (technology, oil revenue, foreign output, and demand for money, foreign interest rate and monetary policy shocks) is calculated by the ratio of covariance of the impulse response of price and exchange rate to variance of the impulse response of exchange rate. Finally, aggregate exchange rate pass-through is computed as the sum of conditional pass-through coefficients in each time weighted by the contribution of each shock. The biggest exchange rate pass-through to consumer prices belongs to oil revenue and foreign output shocks which amounts to about 1, and the smallest one is related to technology shock.
Dr Elham Gholami,
Volume 19, Issue 1 (4-2019)
Volume 19, Issue 1 (4-2019)
Abstract
The application of fiscal stimulus programs (FSPs) to achieve economic growth requires knowing the source of its funding, because different methods and various taxation bases for financing of the FSPs affect their effectiveness and influence the economy. The objective of this paper is to choose the best tax base to finance FSPs in Iran, according to the lowest distortionary effects on efficiency of increasing government spending. For this purpose, first a dynamic stochastic general equilibrium (DSGE) model is designed for Iran. The model consists of three economic factors including the household, domestic firms, and the government as fiscal and monetary authority, and its reliability is checked through the calibration procedure. Then, the multiplier of government spending is estimated within four scenarios for financing government spending. These include the application of tax on income, tax on consumption, a combination of tax on income and tax on consumption (value added tax) and the budget deficit policy. The results show that taxation compared to a budget deficit policy results in decreasing efficiency of the government's fiscal stimulus. However, the reaction of domestic production to the increase in government spending indicate that while a tax on consumption may cover government spending, it has a low negative effect on the efficiency of this fiscal stimulus.
Ali Hussain Samadi, Dr Mansour Zibaei, Dr Jafar Ghaderi, Mrs. Parisa Bahlouli,
Volume 19, Issue 1 (4-2019)
Volume 19, Issue 1 (4-2019)
Abstract
Intervening government and performing environmental policies are among solutions for reducing production externalities and achieving sustainable development. Indeed, institutional quality is an effective factor in selecting optimal environment policies. This paper tries to identify optimal environmental policy among common public tools for intervening (pollution taxes and permits) in the presence of environmental and economic uncertainties with various institutional quality degrees. In this paper, institutional quality is included in a dynamic stochastic general equilibrium model and its effect on choosing environmental policy is considered. The results showed that pollution permit is preferred to taxation on pollution with various institutional quality degrees. In addition, with improvement in institutional quality, if only shock is an environmental shocks, then taxation on pollution will be an optimal policy.
Mr. Mohammad Dehghan Manshadi, Dr Karim Eslamloueyan, Dr Ebrahim Hadian, Dr Zahra Dehghan Shabani,
Volume 20, Issue 3 (9-2020)
Volume 20, Issue 3 (9-2020)
Abstract
The interaction between institutional quality and the mechanism of oil shock diffusion might have a significant effect on macroeconomic dynamics in an oil-exporting country. The literature lacks a formal model to address the role of institutional quality in the economic performance of an oil-rich developing economy. Using a new Keynesian dynamic stochastic general equilibrium (DSGE) framework, this study develops a model to investigate the response of macroeconomic variables to changes in institutional quality resulted from oil shocks in Iran as an important oil-exporting country. Our modeling allows us to show how institutional quality and oil revenues affect households, firms, government, and the central bank. The model is solved and calibrated for the period 1959-2017. The results indicate that the destruction of institutional quality caused by a positive oil shock prevents the Iranian economy from reaping the fruits of an increase in oil revenues. Oil revenues and their shocks by destroying the institutional quality through the expansion of rent-seeking activities, increasing transaction costs of production, reducing the impact of government spending, and diverting monetary and fiscal policies from the targets result in negative effects on Iran's non-oil production in the long run. To reduce the destructive effects of oil shocks on institutional quality in the Iranian economy, we suggest the policymakers in Iran reduce the dependency of the government budget on oil revenues.
Mr. Morteza Dehghandorost, Dr Hassan Heidari, Dr Sahar Bashiri,
Volume 22, Issue 2 (6-2022)
Volume 22, Issue 2 (6-2022)
Abstract
This research examines the macroeconomic variables reaction and banking sector with the financial and monetary shocks using dynamic stochastic general equilibrium model (DSGE). Considering the banking facilities and utilization of seasonal data for the period 1991-2017, the banking sector behavior in the economic dynamics is studied. Therefore, the linear-logarithmic form of the equations is obtained after specifying the model, optimizing, and extracting the first-order conditions. The model is simulated under two different scenarios by considering bank facilities as two types of capital facilities and working capital, and not considering the facilities. The results show that by occurring financial and monetary shocks, the instant reaction of variables is consistent with the theoretical bases of the economy, which indicates the acceptable ability of the model in accurately fitting Iran's economy. Furthermore, comparing the moments of the simulated variables with the real data, the success of the model in simulating the governing facts of the economy is confirmed. Finally, the results show that banking facilities could reduce the range of economic fluctuations and increase the stability of the economy. This issue can be mentioned by the economic policymakers in order to reach economic sustainable development.
Dr. Ali Keshavarzi, Dr. Hamid Reza Horry, Dr. Shokooh Mahmoodi,
Volume 23, Issue 4 (12-2023)
Volume 23, Issue 4 (12-2023)
Abstract
Aim and Introduction
Pandemic diseases are an integral part of the history of human societies and their long-term effects have always been considered. The outbreak of the Covid-19 disease at the end of 2019 caused economists to investigate its economic effects using different models, which were usually based on partial equilibrium. In this study, with the motivation of understanding the effect of the spread of a pandemic disease and its policy responses on economic and health conditions, the dynamic stochastic general equilibrium model and the new Keynesian perspective have been used. Examining the impulse response functions of the variables to the health shock caused by the Covid-19 outbreak indicates a decrease in employment hours, production, consumption, investment, health status and an increase in inflation. In response to these conditions, the increase in public health expenditure leads to a faster convergence of macroeconomic variables to their steady-state values. According to the results of the simulation, it is suggested that the governments use the experiences related to the first wave of the disease outbreak and equip themselves with the necessary tools to use them during the temporary social quarantine (such as the ability to conduct tests on a large part of the population). The ability to identify infected people and impose personal quarantines instead of compulsory quarantines will reduce stagnation. Another solution to control a pandemic is to vaccinate the mass population to achieve herd immunity. All of these require increased public health spending.
Methodology
The evidence and results of the studies indicate the profound effects of epidemics such as the Covid-19 disease on the economy of countries. In this study, with the motivation of understanding the effect of the spread of epidemic diseases (with an emphasis on the Covid-19) on the economy and the government's policy responses to the dynamics of the macroeconomic variables of Iran, a dynamic stochastic general equilibrium (DSGE) model and the New Keynesian (NK) perspective were used. Unlike computable general equilibrium models, DSGE models are in a random environment, and since the duration of the virus's spread and its impact on the economy are unknown, it is more appropriate to use DSGE models (Yang, Zhang and Chen, 2020). In order to achieve the goals of Jazer's studies, in the first step, a DSGE model based on NK was designed and the effect of an epidemic disease on the macroeconomic variables of Iran was simulated. The designed model was quantified with a three-month (seasonal) frequency and using the data of Iran's economy (2004:2-2021:1).
Results and Discussion
The results showed that increasing the risk of health disaster by one standard deviation gradually causes a decline in health status. After that, in order to improve the health status, the quarantine hours were increased, which means an increase in investment in health. On the other hand, since more hours are allocated to quarantine, the hours of employment will decrease and subsequently the final productivity of physical capital will decrease, which is due to the complementarity of labor and capital in Cobb-Douglas production function. Finally, labor income and capital income also decrease. Therefore, production, consumption, and investment fluctuate significantly, and this comes from the optimal choice of the household in the face of this impulse. As a result, as the health status declines and consumption declines, the level of well-being declines (like the result of Yang, Zhang, and Chen, 2020). Over time, the lack of physical capital causes an increase in physical investment and working hours, and finally they slowly return to their previous stable level. In the second step, by applying a change in the AR(1) equation of public health expenditure, the effect of the government's financial reaction on the macroeconomic variables of Iran's economy in the face of the health shock was evaluated. In the base scenario, the government has no intervention in the economy and the state of fiscal inactivity is considered for the government. In another scenario, the active presence of the government, or in other words, the design of discretionary financial policy, affects the economy.
Conclusion
The results showed that the design of a discretionary financial policy in the form of increasing public health expenditure in the context of an epidemic has led to a faster convergence of macroeconomic variables to their stable conditions. In justifying the results, it can be stated that in the face of the outbreak of an epidemic, with the increase in public health expenditure and the subsequent increase in quarantine hours, the employment hours have decreased less. On the other hand, the increase in public health expenditure and the subsequent improvement of health leads to an increase in the productivity of the labor force through the increase in the life expectancy of a person as well as the length of working life. This has led to an increase in household income, followed by an increase in the level of consumption and investment. Also, an increase in public health expenditure leads to an improvement in health status. As a general result, the government's financial reactions in the face of the impulse of an epidemic disease lead to a faster convergence of most variables to their stable conditions in the Iranian economy.
Pandemic diseases are an integral part of the history of human societies and their long-term effects have always been considered. The outbreak of the Covid-19 disease at the end of 2019 caused economists to investigate its economic effects using different models, which were usually based on partial equilibrium. In this study, with the motivation of understanding the effect of the spread of a pandemic disease and its policy responses on economic and health conditions, the dynamic stochastic general equilibrium model and the new Keynesian perspective have been used. Examining the impulse response functions of the variables to the health shock caused by the Covid-19 outbreak indicates a decrease in employment hours, production, consumption, investment, health status and an increase in inflation. In response to these conditions, the increase in public health expenditure leads to a faster convergence of macroeconomic variables to their steady-state values. According to the results of the simulation, it is suggested that the governments use the experiences related to the first wave of the disease outbreak and equip themselves with the necessary tools to use them during the temporary social quarantine (such as the ability to conduct tests on a large part of the population). The ability to identify infected people and impose personal quarantines instead of compulsory quarantines will reduce stagnation. Another solution to control a pandemic is to vaccinate the mass population to achieve herd immunity. All of these require increased public health spending.
Methodology
The evidence and results of the studies indicate the profound effects of epidemics such as the Covid-19 disease on the economy of countries. In this study, with the motivation of understanding the effect of the spread of epidemic diseases (with an emphasis on the Covid-19) on the economy and the government's policy responses to the dynamics of the macroeconomic variables of Iran, a dynamic stochastic general equilibrium (DSGE) model and the New Keynesian (NK) perspective were used. Unlike computable general equilibrium models, DSGE models are in a random environment, and since the duration of the virus's spread and its impact on the economy are unknown, it is more appropriate to use DSGE models (Yang, Zhang and Chen, 2020). In order to achieve the goals of Jazer's studies, in the first step, a DSGE model based on NK was designed and the effect of an epidemic disease on the macroeconomic variables of Iran was simulated. The designed model was quantified with a three-month (seasonal) frequency and using the data of Iran's economy (2004:2-2021:1).
Results and Discussion
The results showed that increasing the risk of health disaster by one standard deviation gradually causes a decline in health status. After that, in order to improve the health status, the quarantine hours were increased, which means an increase in investment in health. On the other hand, since more hours are allocated to quarantine, the hours of employment will decrease and subsequently the final productivity of physical capital will decrease, which is due to the complementarity of labor and capital in Cobb-Douglas production function. Finally, labor income and capital income also decrease. Therefore, production, consumption, and investment fluctuate significantly, and this comes from the optimal choice of the household in the face of this impulse. As a result, as the health status declines and consumption declines, the level of well-being declines (like the result of Yang, Zhang, and Chen, 2020). Over time, the lack of physical capital causes an increase in physical investment and working hours, and finally they slowly return to their previous stable level. In the second step, by applying a change in the AR(1) equation of public health expenditure, the effect of the government's financial reaction on the macroeconomic variables of Iran's economy in the face of the health shock was evaluated. In the base scenario, the government has no intervention in the economy and the state of fiscal inactivity is considered for the government. In another scenario, the active presence of the government, or in other words, the design of discretionary financial policy, affects the economy.
Conclusion
The results showed that the design of a discretionary financial policy in the form of increasing public health expenditure in the context of an epidemic has led to a faster convergence of macroeconomic variables to their stable conditions. In justifying the results, it can be stated that in the face of the outbreak of an epidemic, with the increase in public health expenditure and the subsequent increase in quarantine hours, the employment hours have decreased less. On the other hand, the increase in public health expenditure and the subsequent improvement of health leads to an increase in the productivity of the labor force through the increase in the life expectancy of a person as well as the length of working life. This has led to an increase in household income, followed by an increase in the level of consumption and investment. Also, an increase in public health expenditure leads to an improvement in health status. As a general result, the government's financial reactions in the face of the impulse of an epidemic disease lead to a faster convergence of most variables to their stable conditions in the Iranian economy.
Dr Hossein Samsami Mazreeh Akhoond, Mr Ahmad Bakhtiyari,
Volume 24, Issue 2 (5-2024)
Volume 24, Issue 2 (5-2024)
Abstract
Introduction
The volume of the external money supply is determined by the policymaker, but the amount of money and liquidity will be influenced by the individual's decision to combine their portfolios and the behavior of banks (through lending channels and balance sheets) in the internal money supply. From this perspective, the initial change in external currency (monetary base) causes changes in the supply and demand of all types of assets (such as external and internal money) and their rate of return, and the behavior of individuals and banks determines the optimal composition of the portfolio of assets of individuals and banks and the new and balanced composition of liquidity volume. . Due to differences in the structure of the economy in different countries, the external currency itself can be created from different origins, the exogenous increase of each component of the central bank's asset column (monetary base) causes a change in the relative supply of that asset and its rate of return. Liquidity changes have different sources and are due to changes in the supply of different assets that make up different components of liquidity resources and since the components of liquidity resources are not of the same kind and originate from different processes can have different effects on the performance of macroeconomic variables. The purpose of this article is to analyze and investigate the mechanism of the effect of the components of liquidity resources on the macroeconomic variables of Iran. Changes in liquidity have different sources and are caused by changes in the supply of different assets that form different components of liquidity
sources and can have different effects on the performance of macroeconomic variables. For this purpose, a macroeconomic model by including the components of liquidity resources including net foreign assets of the central bank, net foreign assets of banks and non-bank credit institutions, net debt of the public sector to the central bank, net debt of the public sector to banks and non-bank credit institutions and Non-governmental sector debt is designed to show the relationships of economic variables in the framework of a dynamic stochastic general equilibrium model provides.
Methodology
The model presented in this research is a small open economy consisting of six sectors of households, firms, foreign sectors, banks and credit institutions, government and central bank within the framework of dynamic stochastic general equilibrium model of new Keynesians with respect to nominal and real frictions. By optimizing the objective functions of each of the above brokers, the result of the obtained economic relations is a system of nonlinear differential equations under rational expectations that are currently not empirically solvable, especially in larger patterns. But we can use approximation technique to calculate the model solution in the approximate range functionally. In this research, the set of equations is linear logarithmic using the Ahlik method (1999). In the next step, the input values of the pattern and calibration of parameters and variables have been done using the Iranian economy data during the period 2000-2020. Then, using the Dynar software, the system of equations based on the Bunchard-Kahn method is solved. The results of the statistical tests and moments indicate that the proposed model is suitable for simulating Iran's economy.
Results and Discussion
In order to evaluate the different effects of liquidity resources on economic variables, the reaction of these variables to liquidity component shocks based on instantaneous reaction functions has been investigated. The findings of the research show that the net assets of the banking system through balance of payments and net debt to the banking system through the channel of the state financial balance, if the source of liquidity is created, increases the variables of production, consumption and investment and causes mild growth or decrease of inflation and exchange rate variables. However, if the source of the liquidity creation of non-governmental debts is from the channel of facilitation, it has a decreasing effect on the variables of production, consumption and investment, and only increases inflation and exchange rate. The two sources of the net assets of the banking system and the net of government liabilities to the banking system, contrary to the source of non-governmental sector debt due to the creation of added value in the economy, have more productive effects and investment and less inflationary effects, hence, macroeconomic stability will bring.
Conclusion
The reaction of macroeconomic variables for the same liquidity growth based on instantaneous reaction functions shows that different components of liquidity sources have different effects on macroeconomic variables. These results carry the policy message that, in addition to liquidity management, attention to the developments in liquidity resources components is also important in the field of monetary policy. Considering that liquidity has increased by about 5% in all five components of liquidity components, the effects and implications of the five components of liquidity creation sources can be examined. Comparative results indicate that for the specific growth of liquidity, the increases caused by the net assets of the banking system and the net of public sector liabilities to the banking system have more productive and investment effects and less inflationary effects, hence macroeconomic stability. Therefore, it is recommended that the monetary transition policy as much as possible prevent the increase in non-governmental sector debt which leads to increased liquidity.
The volume of the external money supply is determined by the policymaker, but the amount of money and liquidity will be influenced by the individual's decision to combine their portfolios and the behavior of banks (through lending channels and balance sheets) in the internal money supply. From this perspective, the initial change in external currency (monetary base) causes changes in the supply and demand of all types of assets (such as external and internal money) and their rate of return, and the behavior of individuals and banks determines the optimal composition of the portfolio of assets of individuals and banks and the new and balanced composition of liquidity volume. . Due to differences in the structure of the economy in different countries, the external currency itself can be created from different origins, the exogenous increase of each component of the central bank's asset column (monetary base) causes a change in the relative supply of that asset and its rate of return. Liquidity changes have different sources and are due to changes in the supply of different assets that make up different components of liquidity resources and since the components of liquidity resources are not of the same kind and originate from different processes can have different effects on the performance of macroeconomic variables. The purpose of this article is to analyze and investigate the mechanism of the effect of the components of liquidity resources on the macroeconomic variables of Iran. Changes in liquidity have different sources and are caused by changes in the supply of different assets that form different components of liquidity
sources and can have different effects on the performance of macroeconomic variables. For this purpose, a macroeconomic model by including the components of liquidity resources including net foreign assets of the central bank, net foreign assets of banks and non-bank credit institutions, net debt of the public sector to the central bank, net debt of the public sector to banks and non-bank credit institutions and Non-governmental sector debt is designed to show the relationships of economic variables in the framework of a dynamic stochastic general equilibrium model provides.
Methodology
The model presented in this research is a small open economy consisting of six sectors of households, firms, foreign sectors, banks and credit institutions, government and central bank within the framework of dynamic stochastic general equilibrium model of new Keynesians with respect to nominal and real frictions. By optimizing the objective functions of each of the above brokers, the result of the obtained economic relations is a system of nonlinear differential equations under rational expectations that are currently not empirically solvable, especially in larger patterns. But we can use approximation technique to calculate the model solution in the approximate range functionally. In this research, the set of equations is linear logarithmic using the Ahlik method (1999). In the next step, the input values of the pattern and calibration of parameters and variables have been done using the Iranian economy data during the period 2000-2020. Then, using the Dynar software, the system of equations based on the Bunchard-Kahn method is solved. The results of the statistical tests and moments indicate that the proposed model is suitable for simulating Iran's economy.
Results and Discussion
In order to evaluate the different effects of liquidity resources on economic variables, the reaction of these variables to liquidity component shocks based on instantaneous reaction functions has been investigated. The findings of the research show that the net assets of the banking system through balance of payments and net debt to the banking system through the channel of the state financial balance, if the source of liquidity is created, increases the variables of production, consumption and investment and causes mild growth or decrease of inflation and exchange rate variables. However, if the source of the liquidity creation of non-governmental debts is from the channel of facilitation, it has a decreasing effect on the variables of production, consumption and investment, and only increases inflation and exchange rate. The two sources of the net assets of the banking system and the net of government liabilities to the banking system, contrary to the source of non-governmental sector debt due to the creation of added value in the economy, have more productive effects and investment and less inflationary effects, hence, macroeconomic stability will bring.
Conclusion
The reaction of macroeconomic variables for the same liquidity growth based on instantaneous reaction functions shows that different components of liquidity sources have different effects on macroeconomic variables. These results carry the policy message that, in addition to liquidity management, attention to the developments in liquidity resources components is also important in the field of monetary policy. Considering that liquidity has increased by about 5% in all five components of liquidity components, the effects and implications of the five components of liquidity creation sources can be examined. Comparative results indicate that for the specific growth of liquidity, the increases caused by the net assets of the banking system and the net of public sector liabilities to the banking system have more productive and investment effects and less inflationary effects, hence macroeconomic stability. Therefore, it is recommended that the monetary transition policy as much as possible prevent the increase in non-governmental sector debt which leads to increased liquidity.
Dr Mohammad Nikzad, Dr Mahdi Yazdani,
Volume 24, Issue 3 (9-2024)
Volume 24, Issue 3 (9-2024)
Abstract
Introduction
Balance of payment (BOP) shocks are one of the most important factors causing instability in economies that rely heavily on raw material export. Due to its dependence on oil revenues, the Iranian economy has been affected by balance of payment impulses in different eras, which have led to the instability of the macro-economy, especially the fluctuation of exchange rate, and sometimes occurrence of currency crisis. In the literature of public finance, there are several types of taxes on financial transactions, each of which has been introduced according to a specific purpose. Nevertheless, these taxes have common characteristics that are considered as basis for their selection and implementation at some point of time, especially during the periods of financial crises. These include curbing fluctuations of financial markets, collecting fair taxes and the possibility of reducing tax evasion compared to other taxes as the most important features. Tobin's original idea was a double tax on currency transactions, which is due when the currency is bought and sold. The mentioned tax has a bias towards long-term investment and leads to moving away from short-term speculation and ultimately creating economic stability. In general, this tax can lead to its spending by increasing investment returns and increasing economic stability.
Methodology
One of the presented instruments in the literature of open macroeconomics in order to control excessive exchange rate fluctuations, especially when the economy is faced with exogenous negative impulses such as international sanctions, is to control capital outflow through the Tobin tax in the exchange rate market. In this study, by presenting a DSGE model for an open economy and compatible with the conditions of the Iranian economy, it was tried to evaluate the role of Tobin Tax in stabilizing macroeconomic variables. The focus was especially on evaluating the exchange rate in response to the shocks of the balance of payment in the framework of the managed floating exchange rate system. The presented model in this paper is simulated using the Dynare program that runs in MATLAB software. Daynar is able to find steady-state values for variables of the model and calculates impulse response paths of variables in case of economic shocks. At this stage, the pattern is written in the form of a Dynare file, which should have 5 sections that include the introduction of all variables (including endogenous and exogenous variables and parameters), the equations in the model, the initial values of the variables, and the available impulses. If all the steps above are done correctly, the Dynare program simulates the model and produces the impulse response functions for the variables of model against the included impulses and a summary of the moments of the simulated variables. Hence, in this study, it will be tried to evaluate the role of Tobin Tax in controlling the balance of payments innovations in the framework of the management floating exchange rate system.
Results and Discussion
The results of the analyzed variables show that with the negative shock of oil export, the output also decreases. Due to the decrease in the foreign exchange reserves, the real exchange rate has increased initially. With a decrease in the output and an increase in the real exchange rate, inflation increases at first. With a decrease in the amount of the output, also the consumption will decrease. Finally, with a decrease in the amount of the oil exports, the balance of payment has also been disturbed. The results of the impulse response functions of the oil export as a balance of payment shock showed that the application of Tobin Tax has reduced the variance of the exchange rate resulting from balance of payment shocks, which is in accordance with the economic literature. The obtained results have also shown that, Tobin tax has reduced the deviations of inflation and the output that the welfare loss function have decreased.
Conclusion
Therefore, according to the resuls, the policymaker can use the Tobin tax as a more transparent and efficient policy tool than quotas in the exchange rate market, which lead to provide more efficiency exchange rate market in mid and long-run.
Balance of payment (BOP) shocks are one of the most important factors causing instability in economies that rely heavily on raw material export. Due to its dependence on oil revenues, the Iranian economy has been affected by balance of payment impulses in different eras, which have led to the instability of the macro-economy, especially the fluctuation of exchange rate, and sometimes occurrence of currency crisis. In the literature of public finance, there are several types of taxes on financial transactions, each of which has been introduced according to a specific purpose. Nevertheless, these taxes have common characteristics that are considered as basis for their selection and implementation at some point of time, especially during the periods of financial crises. These include curbing fluctuations of financial markets, collecting fair taxes and the possibility of reducing tax evasion compared to other taxes as the most important features. Tobin's original idea was a double tax on currency transactions, which is due when the currency is bought and sold. The mentioned tax has a bias towards long-term investment and leads to moving away from short-term speculation and ultimately creating economic stability. In general, this tax can lead to its spending by increasing investment returns and increasing economic stability.
Methodology
One of the presented instruments in the literature of open macroeconomics in order to control excessive exchange rate fluctuations, especially when the economy is faced with exogenous negative impulses such as international sanctions, is to control capital outflow through the Tobin tax in the exchange rate market. In this study, by presenting a DSGE model for an open economy and compatible with the conditions of the Iranian economy, it was tried to evaluate the role of Tobin Tax in stabilizing macroeconomic variables. The focus was especially on evaluating the exchange rate in response to the shocks of the balance of payment in the framework of the managed floating exchange rate system. The presented model in this paper is simulated using the Dynare program that runs in MATLAB software. Daynar is able to find steady-state values for variables of the model and calculates impulse response paths of variables in case of economic shocks. At this stage, the pattern is written in the form of a Dynare file, which should have 5 sections that include the introduction of all variables (including endogenous and exogenous variables and parameters), the equations in the model, the initial values of the variables, and the available impulses. If all the steps above are done correctly, the Dynare program simulates the model and produces the impulse response functions for the variables of model against the included impulses and a summary of the moments of the simulated variables. Hence, in this study, it will be tried to evaluate the role of Tobin Tax in controlling the balance of payments innovations in the framework of the management floating exchange rate system.
Results and Discussion
The results of the analyzed variables show that with the negative shock of oil export, the output also decreases. Due to the decrease in the foreign exchange reserves, the real exchange rate has increased initially. With a decrease in the output and an increase in the real exchange rate, inflation increases at first. With a decrease in the amount of the output, also the consumption will decrease. Finally, with a decrease in the amount of the oil exports, the balance of payment has also been disturbed. The results of the impulse response functions of the oil export as a balance of payment shock showed that the application of Tobin Tax has reduced the variance of the exchange rate resulting from balance of payment shocks, which is in accordance with the economic literature. The obtained results have also shown that, Tobin tax has reduced the deviations of inflation and the output that the welfare loss function have decreased.
Conclusion
Therefore, according to the resuls, the policymaker can use the Tobin tax as a more transparent and efficient policy tool than quotas in the exchange rate market, which lead to provide more efficiency exchange rate market in mid and long-run.
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