The Role of Financial Frictions in Iran’s Business Cycles: A DSGE Approach

Authors

Faculty of Economics, University of Tehran, Tehran, Iran

Abstract

B





efore the incidence of the financial crisis in 2008, the financial sector was ignored in the most of business cycles analyses. It was assumed that the financial sector played no independent role in describing business cycle fluctuations and followed the real part of the economy. In recent years, modeling financial frictions have been much considered in business cycles literature. The present study aimed to investigate the role of financial friction in Iranian’s business cycles. For this purpose, a dynamic stochastic general equilibrium (DSGE) model is designed based on the structural features of the Iranian economy and is estimated by using Bayesian method and seasonal data during 1370q1- 1395q4 (1991q2-2017q1). The results indicated that the consideration of financial sector in the model increased our understanding of business cycles fluctuations and financial shocks played an influential role in explaining business cycles fluctuations. Further, based on the results of the present study, the persistence of the effect of financial shocks was more compared to the supply and demand sector shocks.
 

Keywords


Bernanke, B. S., Gertler, M., & Gilchrist, S. (1999). The Financial Accelerator in a Quantitative Business Cycle Framework. Handbook of Macroeconomics, 1, 1341-1393.
Bernanke, B., & Gertler, M. (1989). Agency Costs, Net Worth, and Business Fluctuations. The American Economic Review79(1), 14-31.
Brzoza‐Brzezina, M., & Kolasa, M. (2013). Bayesian Evaluation of DSGE Models with Financial Frictions. Journal of Money, Credit and Banking45(8), 1451-1476.
Carlstrom, C. T., & Fuerst, T. S. (1997). Agency costs, Net worth, and Business Fluctuations: A Computable General Equilibrium Analysis. The American Economic Review, 893-910.
Christiano, L. J., Trabandt, M., & Walentin, K. (2011). Introducing Financial Frictions and Unemployment into a Small Open Economy Model. Journal of Economic Dynamics and Control35(12), 1999-2041.
Gerali, A., Neri, S., Sessa, L., & Signoretti, F. M. (2010). Credit and Banking in a DSGE Model of the Euro Area. Journal of Money, Credit and Banking, 42(s1), 107-141.
Gertler, M., & Karadi, P. (2011). A Model of Unconventional Monetary Policy. Journal of Monetary Economics58(1), 17-34.
Gertler, M., & Kiyotaki, N. (2010). Financial Intermediation and Credit Policy in Business Cycle Analysis. Handbook of Monetary Economics3(3), 547-599.
Hart, O., & Moore, J. (1994). A Theory of Debt Based on the Inalienability of Human Capital. National Bureau of Economic Research, Retrieved from
https://www.nber.org/papers/w3906.pdf.
Iacoviello, M. (2015). Financial Business Cycles. Review of Economic Dynamics18(1), 140-163.
---------- (2005). House Prices, Borrowing Constraints, and Monetary Policy in the Business Cycle. American Economic Review, 95(3), 739-764.
Jermann, U., & Quadrini, V. (2012). Macroeconomic Effects of Financial Shocks. The American Economic Review102(1), 238-271
Kiyotaki, N., & Moore, J. (1997). Credit Cycles. Journal of Political Economy105(2), 211-248.
Pfeifer, J. (2014). A Guide to Specifying Observation Equations for the Estimation of DSGE Models. Research series, 1-150.
Quadrini, V. (2012). Financial Frictions in Macroeconomic Fluctuations. FRB Richmond Economic Quarterly97(3), 209-254.