Macroeconomic Effects of the COVID-19 Pandemic Shock; Implications from a Scenario-Based DSGE Model for Iran

Document Type : Research Paper

Authors

1 Department of Energy Economics & Resources, Faculty of Economics, Kharazmi University, Tehran, Iran

2 Department of Economics, Teesside University International Business School, Middlesbrough, England, United Kingdom

Abstract

Given that shocks such as the COVID-19 Pandemic are likely to occur in the future, it is important to understand how they affect macroeconomic variables. In addition to health shock, global oil price and demand slumped and oil-exporting countries have faced substantial oil shock and budget deficit from the COVID-19 outbreak. Considering the dynamic and stochastic nature of the COVID-19 outbreak, this study mainly aims to evaluate the macroeconomic effects of current COVID-19 shock through the lens of the micro-founded New Keynesian dynamic stochastic general equilibrium (NK-DSGE) model. Our model has been simulated for Iran’s economy, as a major oil exporter and the worst damaged by COVID-19 among oil exporting countries. Since macroeconomic consequences of pandemics are highly dependent on the length and severity of shock persistency, hence three scenarios (optimistic, base, and pessimistic) have been considered and compared. The results are considered in four directions: first, the COVID-19 outbreak strongly influenced consumption, labor productivity, production (goods and services), government oil and tax revenues, and caused stagflation. Second, household response to COVID-19 shock is highly affected by the persistence of shock. Third, the policy response to a budget deficit in the period of COVID-19 is a great concern in oil-exporting developing countries. The policy response could potentially finance from oil-based sovereign wealth funds (SWFs) in oil exporting countries. The IRFs analysis of the SWF-funded policy response indicated limited detrimental outcomes in services and production sector. Fourth, results from implementing a counterfactual tax scenario demonstrated that increasing the government tax base could significantly reduce government budget vulnerabilities during pandemics in oil-exporting developing countries.

Keywords

Iranian Economic Review

Articles in Press, Accepted Manuscript
Available Online from 15 May 2023

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