Analyzing Trade and Exchange Rate polices in Iran Using a DSGE Model

Abstract

Reducing the tariff rates is very important to avoid because it negatively affects domestic industries and leads to devaluation of the national money. Such a reduction, indeed, has multidimensional effects. The aim of this paper is to investigate the effects of trade policy and exchange rate policy in Iran in the framework of a DSGE model for an open small oil-exporting economy on the macro economic variables especially imports and exports. The incomplete exchange rate pass-through in the form of nominal rigidity is also discussed in the model. The model parameters are estimated from 1973 – 2014 using the Bayesian method. The results about the Impact impulse-response function show that the positive shock of exchange rate increases the output and employment and decreases the imports. The impact of this shock on exports, although positive, due to its low elasticity, is not strong enough to increase non-oil exports. Additionally, the effects of positive shocks on intermediate goods tariff rates cause a reduction in the import of these goods, increasing the output and employment, and, in general, reduction of total imports and exports. Also, the positive shock of tariffs on consumer’s goods causes to reduce the import of these goods and total imports.