The Effect of Key Macroeconomic Variables Shocks on GDP in Iran: A Sign Restricted Bayesian VAR Approach

Authors

Faculty of Economics and Administrative Sciences,University of Mazandaran, Babolsar.

Abstract

In this paper we investigate the effect of key macroeconomic variables shocks including, exchange rate, broad money, stock price index and supply shock effect on GDP growth rate in Iran with a novel and advanced econometric method namely, sign restricted bayesian vector autoregression. We employ five variables in the model including, GDP growth rate, broad money, exchange rate, stock price index and inflation rate as well as quarterly data for the period 1370Q2-1395Q4.We identify shocks using Arias et al (2014) algorithm. Empirical findings from impulse response functions indicate negative supply shock decline growth rate for about five periods. Positive exchange rate shock decline growth rate for about four periods and thereafter raises growth rate. Monetary expansionary shock decreases growth rate after a short period. A positive stock market shock has positive effect on growth rate for about three periods and thereafter decreases. Forecast error variance decomposition indicates that negative supply shock, monetary shock and exchange rate shocks are the most important explainers of the GDP growth rate shock respectively.
 

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