The Role of Household Participation in Financial Market in Effectiveness of Monetary Shock on Macroeconomic Dynamics in Iran

Document Type : Research Paper

Authors

1 Ph.D. Candidate in Economics, Shiraz Universityz

2 Professor of Economics, Shiraz University

3 Associate Professor of Economics, Shiraz University

4 Economics, Shiraz University, Shiraz,Iran.

Abstract

Using a sticky price dynamic stochastic general equilibrium (DSGE) model, this paper study how the presence of both Ricardian and non-Ricardian households in the economy might affect the effectiveness of the monetary policy on macroeconomic dynamics and the determinacy of equilibrium in Iran. If the household participation in the financial market is not sufficiently big, the slope of a dynamic IS curve becomes positive. In the case of an upward-sloping IS curve, the equilibrium is indeterminant. Based on the degree of financial development in Iran, we estimate the share of non-Ricardian households for two periods: 1990 to 1999 and 2000 to 2017. The results show that during the first period, the share of non-Ricardian household in Iranian economy was 54 percent and the slope of the IS curve was upward. Hence, the model did not have a stable equilibrium during 1990-1999. However, in the second period, with an increase in the level of financial development in Iran, the share of non-Ricardian household decreased to 38 percent. In this case, the dynamic IS curve sloped downward and the model had a stable unique equilibrium. The impulse response functions show that in the second period, a monetary shock has the expected effect on macroeconomic variables including output, inflation, employment, real wage and the growth rate of money base. Our results underscore the role of households' participation in the financial market in the effectiveness of the monetary policy on macroeconomic variables and the determinacy of equilibrium in a dynamic stochastic model.

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References

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