Volume 20, Issue 2 (6-2025)
J. Mon. Ec. 2025, 20(2): 149-193 |
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shaheed A, rafat M, sameti M, salam N. Fiscal Shocks and Central Bank Responses in Iran: A Bayesian DSGE Model with Non-Ricardian Households in an Open Economy. J. Mon. Ec. 2025; 20 (2) :149-193
URL: http://jme.mbri.ac.ir/article-1-725-en.html
URL: http://jme.mbri.ac.ir/article-1-725-en.html
1- univercity of isfahan
Abstract: (354 Views)
This study investigates optimal fiscal strategies to address persistent budget deficits, alongside central banks’ monetary policy responses—particularly in contexts where some households are excluded from financial markets due to non-Ricardian behavior. By integrating this behavior into a Dynamic Stochastic General Equilibrium (DSGE) framework, we demonstrate why conventional policies may prove suboptimal and how central banks should calibrate interest rates to mitigate systemic risks. Specifically, we examine the macroeconomic effects of tax shocks, government spending shocks, and government bond interest rate shocks in Iran. The analysis incorporates Ricardian and non-Ricardian consumers within a Bayesian DSGE model based on the New Keynesian framework. Using Bayesian methods and annual data (2004–2024), we estimate model parameters. Findings reveal that non-Ricardian consumers amplify the adverse effects of fiscal shocks: Consumption, output, and labor supply decline more sharply, leading to a steeper drop in inflation. Consequently, the central bank should lower the interest rate more aggressively in response to positive tax shocks and negative government spending shocks. Conversely, it should raise the interest rate following positive government bond interest rate shocks to prevent banking system collapse.
Keywords: Bayesian estimation, DSGE model, Fiscal shocks, Iranian economy, Non-Ricardian households.
Type of Study: Original Research - Empirical |
Subject:
Macroeconomics
Received: 3 Aug 2025 | Accepted: 15 Sep 2025 | Published: 5 Oct 2025
Received: 3 Aug 2025 | Accepted: 15 Sep 2025 | Published: 5 Oct 2025
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